Return and Risk of Human Capital Contracts

34 Pages Posted: 17 Dec 2013

See all articles by Tim Alexander Kroencke

Tim Alexander Kroencke

University of Neuchatel - Institute of Financial Analysis

Grit Mühler

ZEW – Leibniz Centre for European Economic Research

Maresa Sprietsma

ZEW – Leibniz Centre for European Economic Research

Date Written: December 10, 2013

Abstract

Human capital contracts give private investors the right to a share of students' future earnings in return for a financial contribution during their studies. Although still rarely used, human capital contracts could not only help to complement limited public funding for higher education but might also be an alternative to traditional financial assets. Using a dataset covering 1% of German households for the period 1995-2009, we analyse the return and risk properties that can be expected from human capital contracts. We find that funds of human capital contracts provide low risk exposures to stocks and bonds. As a result, risk-adjusted returns of funds of human capital contracts are significantly positive under fairly weak conditions. Thus, human capital contracts potentially offer large diversification benefits for investors and might be a way to improve the state's educational budget.

Keywords: human capital returns, human capital contracts, risk and return of non-traded assets, mean-variance spanning tests

JEL Classification: I21, J24, G11, G12

Suggested Citation

Kroencke, Tim Alexander and Mühler, Grit and Sprietsma, Maresa, Return and Risk of Human Capital Contracts (December 10, 2013). ZEW - Centre for European Economic Research Discussion Paper No. 13-108. Available at SSRN: https://ssrn.com/abstract=2368231 or http://dx.doi.org/10.2139/ssrn.2368231

Tim Alexander Kroencke (Contact Author)

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel,7
Neuchatel, CH-2000
Switzerland

Grit Mühler

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Maresa Sprietsma

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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