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Asset Management, Human Capital, and the Market for Risky Assets

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  • Isaac Ehrlich
  • William A. Hamlen Jr.
  • Yong Yin

Abstract

Conventional finance models treat risky‐asset prices as “fully (information) revealing.” Less work exists on how prices become information revealing. Our answer focuses on the micro foundations of information acquisition and the role of human capital in “asset management.” We derive testable propositions on how education and the opportunity cost of asset management affect risky‐asset demand, portfolio returns, asset‐price volatility, and equity premiums. Using micro‐level data, we find that education raises the portfolio share of risky assets and overall portfolio returns, whereas wage rates exert opposite effects. We find that the rate of return to education in generating nonwage income is nontrivial.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Human Capital.

Volume (Year): 2 (2008)
Issue (Month): 3 ()
Pages: 217-262

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Handle: RePEc:ucp:jhucap:v:2:i:3:y:2008:p:217-262

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  1. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
  2. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, October.
  3. Laura Veldkamp, 2004. "Media Frenzies in Markets for Financial Information," Econometric Society 2004 North American Winter Meetings 4, Econometric Society.
  4. Gary S. Becker & Kevin M. Murphy, 2007. "Education and Consumption: The Effects of Education in the Household Compared to the Marketplace," Journal of Human Capital, University of Chicago Press, vol. 1(1), pages 9-35.
  5. Rajnish Mehra & Edward C. Prescott, 2003. "The Equity Premium in Retrospect," NBER Working Papers 9525, National Bureau of Economic Research, Inc.
  6. Perraudin, William R. M. & Sorensen, Bent E., 2000. "The demand for risky assets: Sample selection and household portfolios," Journal of Econometrics, Elsevier, vol. 97(1), pages 117-144, July.
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Cited by:
  1. Yohei Okawa & Eric van Wincoop, 2010. "Gravity in International Finance," Working Papers 072010, Hong Kong Institute for Monetary Research.
  2. James Poterba & Steven Venti & David A. Wise, 2013. "Health, Education, and the Postretirement Evolution of Household Assets," Journal of Human Capital, University of Chicago Press, vol. 7(4), pages 297 - 339.
  3. Ehrlich, Isaac & Shin, Jong Kook & Yin, Yong, 2011. "Private Information, Human Capital, and Optimal "Home Bias" in Financial Markets," IZA Discussion Papers 6060, Institute for the Study of Labor (IZA).
  4. Isaac Ehrlich & Jong Kook Shin, 2010. "The Role of Human Capital in Imperfectly Informed International Financial Markets," Working Papers 092010, Hong Kong Institute for Monetary Research.
  5. Isaac Ehrlich & Jong Kook Shin & Yong Yin, 2010. "Human Capital, Endogenous Information Acquisition,and Home Bias in Financial Markets," Working Papers 202010, Hong Kong Institute for Monetary Research.
  6. Isaac Ehrlich & Jong Kook Shin, 2010. "Human Capital and Imperfectly Informed Financial Markets," American Economic Review, American Economic Association, vol. 100(2), pages 244-49, May.

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