Asset Pricing and Optimal Portfolio Choice in the Presence of Human Capital
11 Pages Posted: 16 Feb 2007
Date Written: December 18, 2006
This study analyses the ability of human capital and other factors affecting share prices like, dividend, treasury bills, and government bonds, in predicting variation of stock returns on the Indian stock market for the period of 1996:04-2005:06. We use variations of Campbell (1996) equilibrium multifactor model to analyze the pattern of security prices. Furthermore we use VAR estimates, Granger Causality/Block Exogeneity Wald Tests, Seemingly Unrelated Regression Estimation, and Impulse Responses to estimate asset returns.
Our results show that Human capital is a significant factor affecting share prices and labor has a causal relationship with security prices. There is also a causal relationship between stock returns and dividend, and vise versa.
Keywords: Capital Asset Pricing Model (CAPM), Intertemporal Capital Asset Pricing (ICAPM), Equilibrium Multifactor model, Human capital, VAR estimates, Granger Causality/Block Exogeneity Wald Tests, Seemingly Unrelated Regression Estimation (SURE), Impulse Response Functions (IRF)
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