Capital Share Risk in U.S. Stock Pricing

Value and momentum strategies earn persistently large return premia yet are negatively correlated. Why? We find that the negative correlation is largely attributable to opposite signed exposure of value and momentum to long-horizon growth in the capital share of income, which explains up to 85% of the variation in returns on size-book/market portfolios and up to 95% of momentum returns, while outperforming popular return-based factor models. Opposite signed exposure of value and momentum to capital share risk coincides with opposite signed exposure to the income shares of stockholders in the top 10 versus bottom 90 percent of the stock-wealth distribution.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

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