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

Dynamic risk‐return relation with human capital: a study on Indian markets Purpose – The 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/approach – The 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. Findings – Empirical 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/value – This 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Emerging Markets Emerald Publishing

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

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Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
1746-8809
DOI
10.1108/17468801211209929
Publisher site
See Article on Publisher Site

Abstract

Purpose – The 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/approach – The 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. Findings – Empirical 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/value – This 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.

Journal

International Journal of Emerging MarketsEmerald Publishing

Published: Apr 6, 2012

Keywords: India; Human capital; Returns; Stock prices; Capital asset pricing model; Inter‐temporal capital asset pricing model; Equilibrium multifactor model

References