Implications of Keeping up with the Joneses Behavior for the Equilibrium Cross Section of Stock Returns: International Evidence

Posted: 3 Feb 2009 Last revised: 17 Mar 2015

See all articles by Juan-Pedro Gomez

Juan-Pedro Gomez

IE Business School - IE University

Richard Priestley

Norwegian Business School

Fernando Zapatero

Questrom School of Business, Boston University

Date Written: February 3, 2009

Abstract

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

Gomez, Juan-Pedro and Priestley, Richard and Zapatero, Fernando, Implications of Keeping up with the Joneses Behavior for the Equilibrium Cross Section of Stock Returns: International Evidence (February 3, 2009). 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, Available at SSRN: https://ssrn.com/abstract=1336902

Juan-Pedro Gomez

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain
+34 917821326 (Phone)

HOME PAGE: http://www.ie.edu/faculty/juan-pedro-gomez/

Richard Priestley (Contact Author)

Norwegian Business School ( email )

Nydalsveien
37
N-0442 Oslo, 0283
Norway
47 46410515 (Phone)

Fernando Zapatero

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-3631 (Phone)

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