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Author Palacios, Miguel
Title Essays on human capital and finance
book jacket
Descript 130 p
Note Source: Dissertation Abstracts International, Volume: 70-10, Section: A, page:
Adviser: Jonathan Berk
Thesis (Ph.D.)--University of California, Berkeley, 2009
Human capital is the largest asset in any economy. Changes to its value affect consumption and investment decisions, and thus asset-prices. Yet, we don't observe human capital, we merely wages, which are analogous to a "dividend", and therefore we need to infer its value and impact on economic decisions indirectly. In this dissertation, we will be mostly focused on how human capital affects asset prices. The three chapters look at the same question from different angles
The first chapter is a model for valuing and calculating the returns to human capital. It derives the value and the risk of aggregate human capital in a dynamic equilibrium production model. The model shows that, under parsimonious assumptions, the relationship between consumption growth and the ratio of wages to consumption is counter-cyclical. As a result, human capital is less risky than equity, implying that the risk premium of human capital is lower than that of equity. With lower expected returns than equity, human capital has a weight in the aggregate wealth portfolio that exceeds the ratio of wages to consumption. The calibration of the model delivers three key results. First, the weight of human capital in the aggregate wealth portfolio is 95%. Second, a portfolio invested 45% in equity and 55% in risk-free bonds approximately replicates aggregate human capital returns. Third, the covariance between equity returns and human capital returns is larger than the covariance between equity returns and wage growth. Using the results of the model, the first chapter ends with an estimate of human capital returns between 1959 and 2007 and concludes that this estimate of returns to human capital better explains the cross-section of asset returns than an estimate based on aggregate wage growth
The second chapter is an empirical analysis of the relationship between labor intensity---the ratio of wages to production---and the risk of assets. The chapter starts presenting a simple production model and continues with an empirical test of it. The evidence in this chapter suggests that labor intensive industries are riskier. Not only is the result statistically significant at the 1% level, it is also economically significant. Regressions of an industry's beta on the industry's labor intensity suggests that a 10% increase in labor intensity is associated with 4%--6% increase in beta. The evidence also shows that increases in labor intensity over time are associated with increases in the riskiness of industries over time. The relationship between beta and labor intensity does not seem to be driven by operational leverage, since the relationship between labor intensity and volatility is much weaker
The third chapter goes beyond beta and attempts to establish a relationship between wages growth and the fraction of portfolio returns unexplained by beta. In particular, I test whether wage growth of particular demographic groups better explains the cross-section of asset returns than aggregate wage growth. I use monthly data from the Current Population Survey between 1989 and 2004 to disaggregate labor income growth by age-group. The test yields two key results. First, labor income growth of these age groups does not perform better than aggregate income growth in explaining the cross-section of stock returns. Second, only the labor income growth of middle-aged individuals is priced in stock returns. These results suggest that the returns to human capital of different generational groups are not only different, but also have a different impact on equilibrium asset returns
The results of the three chapters add to a growing volume of evidence that suggests that human capital does matter. Theoretically and empirically, the presence of wages affects consumption decisions and the riskiness of assets---and therefore their prices. This evidence sheds light on how the effect takes place, and my future research will continue exploring this area
School code: 0028
Host Item Dissertation Abstracts International 70-10A
Subject Economics, Finance
Economics, Labor
Alt Author University of California, Berkeley
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