Capital Share Risk in U.S. Asset Pricing: A Reappraisal

with Nikolay Gospodinov, 2020, working paper, R&R at the Journal of Finance. [Paper] [Online Appendix] [Code and Data]. Using long-horizon beta estimates, Lettau, Ludvigson, and Ma (2019) document striking pricing ability and cross-sectional explanatory power for a capital share growth factor across major asset classes. We revisit their findings and show that the spectacular performance of their factor is likely due to the interaction between the lack of identification of the proposed single-factor model and the persistence induced by the overlapping of the data for the purpose of obtaining long-horizon beta estimates. This casts doubts on whether capital share betas are truly priced in the cross-section of asset expected returns.