Dynamic risk-return relation with human capital: a study on Indian markets

The purpose of this paper is to test a discrete time asset pricing model where a non-marketable asset (human capital), along with other factors predicting stock returns, explain risk return relationship. The paper will add to the literature on risk return relationship with human capital by investigating the hypothesis that human capital is a significant factor affecting stock prices. Empirical findings validate the model that including human capital as a proxy for aggregate wealth in the economy can better predict stock prices than the standard empirical capital asset pricing model. There is a Granger cause relationship between security prices and labor income and it is further concluded that labor and dividend are significant factors affecting security prices.