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

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

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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File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?id=doi:10.1086/593051
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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
Contact details of provider: Web page: http://www.journals.uchicago.edu/JHC/

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  1. Rajnish Mehra & Edward C. Prescott, 2003. "The Equity Premium in Retrospect," NBER Working Papers 9525, National Bureau of Economic Research, Inc.
  2. Laura Veldkamp, 2004. "Media Frenzies in Markets for Financial Information," Econometric Society 2004 North American Winter Meetings 4, Econometric Society.
  3. 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.
  4. 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.
  5. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, March.
  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.
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