Human Capital, Business Cycles and Asset Pricing

70 Pages Posted: 1 Jul 2004

See all articles by Min Wei

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs

Date Written: May 9, 2004


I investigate the asset pricing and business cycle implications of a dynamic stochastic general equilibrium model with human capital and education. Key features of the model are (1) a higher consumption risk resulting from the representative agent's desire to smooth leisure and from the short-run inelasticities in physical and human capital investment, and (2) a countercyclical risk aversion induced by shocks to human capital. The model provides a good fit to a number of asset-pricing facts including a low risk-free rate, an upward-sloping yield curve, a higher equity premium, countercyclical dividend yields, and long-horizon predictability of excess stock returns. On the macroeconomic side, the model matches conventional business-cycle statistics as well as a standard model does, while generating a high volatility in hours worked and a negative correlation between the output and the time spent in education, both of which are consistent with the data.

Keywords: Human capital, education, asset pricing, equity premium puzzle, time-varying risk aversion

JEL Classification: E32, E44, G12

Suggested Citation

Wei, Min, Human Capital, Business Cycles and Asset Pricing (May 9, 2004). Available at SSRN: or

Min Wei (Contact Author)

Board of Governors of the Federal Reserve - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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