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

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 education. 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.