Financial risk exposure of returns to education: Panel evidence from Korea*

• Date: 01 March 2018
• Published date: 01 March 2018
• Author: Jungjoon Ihm,Jaeram Lee
• DOI: http://doi.org/10.1111/asej.12143

Financial risk exposure of returns to education:

Panel evidence from Korea*

Jaeram Lee and Jungjoon Ihm

Received 24 November 2017; Accepted 27 December 2017

The present study examined financial market risk exposure of human capital

returns, which are represented by the returns to education, using panel data for

Korea. Overall, financial market shocks seem to be irrelevant to returns to educa-

tion. However, when we divide a financial market shock into cash flow news and

discount rate news leading to a negative risk premium, returns to education

increase after positive news about future cash flows and unexpected increases in

discount rates Therefore, the risk exposure to cash flow shocks is offset by the

exposure to discount rate shocks. The returns to education of low-income workers

were significantly exposed to the cash flow risk as compared to those with a high

income, but they were offset by the positive correlation to discount rate shocks. In

contrast, considering the gap between generations, the old generation was not only

less exposed to the cash flow risk compared to the young generation regarding

returns to education but also positively correlated with the discount rate shock,

resulting in less exposure to financial market risks.

Keywords: education economics, education finance, human capital returns,

returns to education, risk management.

JEL classification codes: G12, I22, I26, J24.

doi: 10.1111/asej.12143

I. Introduction

The choice between consumption and investment has long been an economic

issue of interest. In particular, in a situation where diverse investable assets

exist, to what extent will an investment be made in each asset? In other words,

the problem of ‘portfolio choice’remains among the most important issues in

the economics literature. When we think about the importance of labor income

to households, there is a need for not only tangible assets but also human capital

returns to be included in the portfolio choices (Jagannathan and Wang, 1996;

Lustig et al., 2013). As a result, the market portfolios that, according to tradi-

tional investment theory, play an important role in consumption choice can be

*Lee: College of Business, Gachon University, Seongnam-si, Gyeonggi-do, Korea. Ihm (corre-

sponding author): School of Dentistry, Seoul National University, Gwanak-gu, Seoul, Korea.

Email: ijj127@snu.ac.kr The authors would like to thank the anonymous reviewers for the insightful

comments and suggestions on the draft of this paper.

© 2018 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2018, Vol.32 No. 1, 83–97 83