Dynamic risk‐return relation with human capital: a study on Indian markets

Emerald - 2012
SanthakumarShijin1, Arun KumarGopalaswamy2, DebashisAcharya3
1T.A. Pai Management Institute, Manipal, India
2Department of Management Studies, IIT Madras, Chennai, India
3Department of Economics, University of Hyderabad, Hyderabad, India

Tóm tắt

PurposeThe purpose of this paper is to test a discrete time asset pricing model where a non‐marketable asset (human capital), along with other factors predicting stock returns, explain risk return relationship. The paper will add to the literature on risk return relationship with human capital by investigating the hypothesis that human capital is a significant factor affecting stock prices.Design/methodology/approachThe dynamic inter‐linkages of factors representing financial and human components of wealth in predicting stock returns is tested in the Indian market for the period of 1996:04 to 2005:06. The procedures employed include Granger causality tests, impulse response functions and seemingly unrelated regression estimates.FindingsEmpirical findings validate the model that including human capital as a proxy for aggregate wealth in the economy can better predict stock prices than the standard empirical capital asset pricing model. There is a Granger cause relationship between security prices and labor income and it is further concluded that labor and dividend are significant factors affecting security prices.Originality/valueThis is one of the first papers to study the human capital aspect in predicting stock returns in the Indian market. In addition, the paper provides important insights into the causal relationship of human capital and market return in explaining the risk return relationship.

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