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Asset Prices and Capital Share Risks: Theory and Evidence

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  • Byrne, Joseph P
  • Ibrahim, Boulis Maher
  • Zong, Xiaoyu

Abstract

An asset pricing model using long-run capital share growth risk has recently been found to successfully explain U.S. stock returns. Our paper adopts a recursive preference utility framework to derive an heterogeneous asset pricing model with capital share risks.While modeling capital share risks, we account for the elevated consumption volatility of high income stockholders. Capital risks have strong volatility effects in our recursive asset pricing model. Empirical evidence is presented in which capital share growth is also a source of risk for stock return volatility. We uncover contrasting unconditional and conditional asset pricing evidence for capital share risks.

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  • Byrne, Joseph P & Ibrahim, Boulis Maher & Zong, Xiaoyu, 2020. "Asset Prices and Capital Share Risks: Theory and Evidence," MPRA Paper 101781, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:101781
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    More about this item

    Keywords

    Asset Pricing; Capital Share; Recursive Preference; Consumption Growth; Bayesian Methods.;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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