The human capital of stockholders and the international diversification puzzle

This paper evaluates the extent of the international diversification puzzle when human capital is considered part of the wealth of nations. The analysis examines whether (i) the inclusion of human capital in the wealth of portfolio of individuals, (ii) the different human capital assets held by stockholders and non-stockholders, and (iii) frictions in human capital markets, can help explain the puzzle. The methodology consists of comparing Hansen– Jagannathan bounds on the stochastic discount factor (IMRS) implied by human capital and financial returns across different countries. The results suggest that the information contained in the human capital of stockholders can greatly contribute towards explaining the international diversification puzzle.