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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

Risky-asset prices are conventionally modeled as "fully (information-) revealing". Much less work has been done on how prices get to reveal information. Following the "noisy-prices", rational-expectations approach, our answer focuses on the micro-foundations of information acquisition and the role of human capital in asset, or risk, management. We derive testable propositions on how education and other determinants of asset management affect its intensity, risky-asset demand, and portfolio returns. We derive related insights concerning determinants of the level and volatility of asset prices and equity premiums. Using micro-level data on portfolio choices, we find that education raises both the portfolio share of risky assets and overall portfolio returns, while a measure of the opportunity cost of asset management has the opposite effects. Our results indicate a non-trivial return to education in generating non-wage income. They suggest that educational attainments directly affect the distribution of income as well as earnings.

Suggested Citation

  • Isaac Ehrlich & William A. Hamlen Jr. & Yong Yin, 2008. "Asset Management, Human Capital, and the Market for Risky Assets," NBER Working Papers 14340, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:14340
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    References listed on IDEAS

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    10. 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.
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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. Ehrlich, Isaac & Hamlen, William Jr., 1995. "Optimal portfolio and consumption decisions in a stochastic environment with precommitment," Journal of Economic Dynamics and Control, Elsevier, vol. 19(3), pages 457-480, April.
    8. 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.
    9. 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.
    10. 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.

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    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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