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

TLDR: In this paper, a discrete time asset pricing model where a non-marketable asset (human capital) along with other factors predicting stock returns, explain risk return relationship was proposed.

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 ...