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

Author

Listed:
  • 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.

Suggested Citation

  • Isaac Ehrlich & William A. Hamlen Jr. & Yong Yin, 2008. "Asset Management, Human Capital, and the Market for Risky Assets," Journal of Human Capital, University of Chicago Press, vol. 2(3), pages 217-262.
  • Handle: RePEc:ucp:jhucap:v:2:i:3:y:2008:p:217-262
    DOI: 10.1086/593051
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    References listed on IDEAS

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    1. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4, National Bureau of Economic Research, Inc.
    2. 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.
    3. Mayers, David, 1974. "Portfolio theory, job choice and the equilibrium structure of expected wages," Journal of Financial Economics, Elsevier, vol. 1(1), pages 23-42, May.
    4. Laura L. Veldkamp, 2006. "Media Frenzies in Markets for Financial Information," American Economic Review, American Economic Association, vol. 96(3), pages 577-601, June.
    5. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, August.
    6. Mehra, Rajnish & Prescott, Edward C., 2003. "The equity premium in retrospect," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 14, pages 889-938, Elsevier.
    7. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
    8. 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.
    9. 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.
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    Citations

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    Cited by:

    1. Isaac Ehrlich & Jong Kook Shin & Yong Yin, 2011. "Private Information, Human Capital, and Optimal "Home Bias" in Financial Markets," Journal of Human Capital, University of Chicago Press, vol. 5(3), pages 255-301.
    2. 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.
    3. Okawa, Yohei & van Wincoop, Eric, 2012. "Gravity in International Finance," Journal of International Economics, Elsevier, vol. 87(2), pages 205-215.
    4. Stephen J. Turnovsky & Aditi Mitra, 2013. "The Interaction between Human and Physical Capital Accumulation and the Growth-Inequality Trade-off," Journal of Human Capital, University of Chicago Press, vol. 7(1), pages 26-75.
    5. 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.
    6. 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.
    7. Isaac Ehrlich & Jong Kook Shin, 2010. "Human Capital and Imperfectly Informed Financial Markets," American Economic Review, American Economic Association, vol. 100(2), pages 244-249, May.
    8. Matthew Wiswall & Basit Zafar, 2015. "How Do College Students Respond to Public Information about Earnings?," Journal of Human Capital, University of Chicago Press, vol. 9(2), pages 117-169.
    9. 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.

    More about this item

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • I0 - Health, Education, and Welfare - - General
    • I20 - Health, Education, and Welfare - - Education - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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