Nonmarketable assets and capital market equilibrium under uncertainty
Master Student's Name Lasha Bokuchava Master Thesis Title Nonmarketable Assets and Capital Market Equilibrium under Uncertainty Faculty Graduate School of Management Main field of study Corporate Finance Year 2016 Academic Advisor's Name Alexander V. Bukhvalov Description of the goal, tasks and main results In this paper, the author pays special attention to the model developed by Mayers (1972) who challenged the assumption of marketability of all assets by introducing the effect of 5 nonmarketable assets. Mayers examined the role of returns to human capital as a proxy for nonmarketable asset. Mayers' extended model suggests that since any individual investor's human capital is unique, the covariance between the market portfolio and payoffs to human capital will have an impact on the optimal weight of the market portfolio, therefore, the covariance explains why investors hold different portfolios in reality. This research aims to understand whether the CAPM with nonmarketable assets has meaningful implications in the Russian market. The following objectives are met to realize the ultimate goal of the paper: 1. Theoretical and empirical background of the traditional Capital Asset Pricing Model are covered; 2. Theoretical and empirical background of the CAPM model with nonmarketable assets are covered; 3. Methodologies for the calculation of differences between the Mayers and SLM risk measures are derived; 4. The data on 50 most liquid stocks of Russia's largest companies is obtained. The companies are further segmented into 10 different sectors of economy to precisely evaluate the effect of returns to human capital on different classes of assets; 5. Regressions are run to estimate risk measures for respective classes of assets; 6. Differences between the Mayers and SLM risk measures are calculated to check whether this differences lead to significant deviations in final estimations of the required returns on risky assets in Russia; 7. Interpretation of results and limitations of the approach are elaborated. Contrary to the SLM model, the expanded model implies that not all maximizing investors hold the identical (except for scale) portfolio of marketable assets. It implies that each investor holds a portfolio of marketable assets that solves his personal (and possibly unique) portfolio problem and, therefore, allows investors to maintain unique portfolios. Empirical analysis of the CAPM with nonmarketable assets has shown significant difference of the estimates of the models for Innovations sectors. The beta predicted by extended model is 9.2% higher than the SLM 6 beta. Unfortunately, the research has failed to prove the validity of the model for other sectors of companies and for the market in general, which may be attributable to the limitations stated in the paper. These limitations include: 1) the quarrels about the way to define human capital, 2) the controversy of using human capital as a proxy, and 3) the imperfection of data on Russian stock market.