Asset Prices and Capital Share Risks : Theory and Evidence

Pricing of capital share risks provides a novel link between macroeconomicsand finance. Our paper adopts the Epstein-Zin type utility framework andthe Bansal and Yaron's (2004) long-run risk model to derive an heterogeneousasset pricing model that extends Lettau et al.'s (2019) capital share study. Ourmodel introduce heterogeneity within the stock market and highlights the roleof elevated consumption volatility of high income stockholders in capital risks.We also uncover contracting evidences as the capital share growth has strongvolatility effects in the short-run and capital share variability enters systematicrisks in the long-run