Implications of Keeping up with the Joneses Behavior for the Equilibrium Cross Section of Stock Returns: International Evidence
Implications of Keeping-up-with-the-Joneses Behavior for the Equilibrium Cross Section of Stock Returns: International Evidence Juan-Pedro Gómez, Richard Priestley and Fernando Zapatero The Journal of Finance Vol. 64, No. 6 (Dec., 2009), pp. 2703-2737
Posted: 3 Feb 2009 Last revised: 17 Mar 2015
Date Written: February 3, 2009
This paper tests the cross-section implications of "keeping up with the Joneses" (KUJ) preferences in an international setting. When agents have KUJ preferences, in the presence of un-diversifiable non-financial wealth, both world and domestic risk (the idiosyncratic component of domestic wealth) are priced, and the equilibrium price of risk of the domestic factor is negative. We use labor income as a proxy for domestic wealth and find empirical support for these predictions. Our test includes securities from the US, UK, Japan and Germany. In terms of explaining the cross-section of stocks returns and the size of the pricing errors, the model based on relative wealth concerns performs better than alternative international asset pricing models.
Keywords: Keeping up with the Joneses, restricted market participation, international asset pricing, local risk, global risk
JEL Classification: G15, G12, G11
Suggested Citation: Suggested Citation