Labor income, relative wealth concerns, and the cross section of stock returns

Abstract

The finance literature documents a relation between labor income and the cross-section of stock returns. One possible explanation for this is the hedg-ing decisions of investors with relative wealth concerns. This implies a negative risk premium associated with stock returns correlated with local undiversi able wealth, since investors are willing to pay more for stocks that help their hedging goals. We nd evidence that is consistent with these regularities. In addition, we show that the e ect varies across geographic areas depending on the size and variability of undiversi able wealth, proxied by labor income.