Labor Income, Relative Wealth Concerns, and the Cross-section of Stock Returns

Fernando Zapatero, Marshall School of Business, University of Southern California

17th Aug 2012  11:30 am - Room 214/215 Economics and Business Building

The finance literature documents the relation between labor income and the cross- section of stock returns. A possible explanation is the hedging of investors with relative wealth concerns who pay a premium for securities that help them to keep up with their peers. At the census division level we find that the risk premium associated with labor income risk is negative and statistically significant. This premium is predominantly local in nature, as opposed to the aggregate, country-wide cross-sectional effect so far documented. Also, it is larger in areas with lower population density, as expected when investors have relative wealth concerns.