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Labor Rigidity and the Dynamics of the Value Premium

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  • Roberto Marfè

    (Colegio Carlo Alberto)

Abstract

This paper documents that (i) the labor-share is a strong predictor of both the value and duration premia, (ii) these premia are highly correlated, and (iii) the labor-share does not forecast the component of the value premium orthogonal to the duration premium. A simple equilibrium model with labor rigidity and heterogeneity in cash-flow durations rationalizes these stylized facts. The economic channel is a term-structure effect: labor rigidity boosts short-run dividend risk because wages are more responsive to permanent than transitory shocks. This leads to downward-sloping equity risk and to a cross-sectional duration premium. In turn, value firms earn a compensation over growth firms which is predicted by labor-share variation.

Suggested Citation

  • Roberto Marfè, 2017. "Labor Rigidity and the Dynamics of the Value Premium," 2017 Meeting Papers 466, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:466
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    Cited by:

    1. Roberto Marfè, 2016. "Corporate Fraction and the Equilibrium Term Structure of Equity Risk," Review of Finance, European Finance Association, vol. 20(2), pages 855-905.
    2. Matthijs Breugem & Stefano Colonello & Roberto Marfè & Francesca Zucchi, 2020. "Dynamic Equity Slope," Working Papers 2020:21, Department of Economics, University of Venice "Ca' Foscari".
    3. Hasler, Michael & Khapko, Mariana & Marfè, Roberto, 2019. "Should investors learn about the timing of equity risk?," Journal of Financial Economics, Elsevier, vol. 132(3), pages 182-204.

    More about this item

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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