Risk and Return in Networked Village Economies

We apply the Consumption-based Asset Pricing Model (CCAPM) of the finance literature to study the risk and return of household business assets in developing economies. Using monthly panel data from a household survey in rural Thailand, we find that higher exposure to aggregate, non-diversifiable risk, as measured by household beta or the co-movement of the return of the individual household enterprise with the aggregate return, is associated with higher expected return on household business assets. The primary specification is township level, with four village connected through family ties, but the results are robust at the individual village level, and kinship related dynasties within villages. The main prediction is also robust to allowing for human capital and time-varying stochastic discount factors. However, contrary to the model, the more the households are exposed to idiosyncratic risks, the higher also is the expected rate of return. We find that exposure to both aggregate and idiosyncratic risks of the household is positively associated with the education of household head and negatively associated with the initial wealth of the household. We then use the estimates from the model to compute the risk-adjusted rate of return for each household. This residual varies negatively with the age of household head.