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Human Capital as an Asset Class: Implications from a General Equilibrium Model

Author

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  • Miguel Palacios

    (Owen Graduate School of Management, Vanderbilt University)

Abstract
This paper derives the value and the risk of aggregate human capital in a dynamic equilibrium production model with Duffie-Epstein preferences. In this setting the expected return of a risky asset is a function of the asset's covariance with consumption growth and a weighted average of the asset's covariance with aggregate wage growth and aggregate financial returns. A calibration of the model matching the historical ratio of wages to consumption in the United States (85% between 1950 and 2007) suggests that the weight of human capital in aggregate wealth is 87%. The results of the calibration follow from the relative size of wages and dividends in the economy and the dynamics of the ratio of wages to consumption, which are 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.

Suggested Citation

  • Miguel Palacios, 2010. "Human Capital as an Asset Class: Implications from a General Equilibrium Model," Working Papers 2011-016, Human Capital and Economic Opportunity Working Group.
    • Handle: RePEc:hka:wpaper:2011-016
    Note: M, MIP
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    File URL: http://humcap.uchicago.edu/RePEc/hka/wpaper/Palacios_2010_human-capital-asset.pdf
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    3. Betermier, Sebastien & Jansson, Thomas & Parlour, Christine & Walden, Johan, 2012. "Hedging labor income risk," Journal of Financial Economics, Elsevier, vol. 105(3), pages 622-639.
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    6. Esther Eiling, 2013. "Industry-Specific Human Capital, Idiosyncratic Risk, and the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 68(1), pages 43-84, February.

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