Local Envy and Global Stock Market Participation
Posted: 24 Feb 2002
Although investors' concern with relative consumption, or their desire to "keep up with the Joneses" has been studied quite extensively in the existing literature, a potentially important geographic aspect of this behavior has not been emphasized: To the extent that investors' preferences exhibit envy, it is likely that this envy will be local - investors use their compatriots' consumption as their frame of reference. In this paper, we examine in what sense such local envy can help explain the home bias puzzle. We show that local envy creates an incentive for investors to hedge against movements in aggregate, national wealth, and hence can induce individual investors to hold home-biased portfolios if the aggregate portfolio is biased toward the domestic asset. On the other hand, local envy tends to increase (rather than decrease) the value of participation in foreign stock markets, and thus cannot help explain investors' non-participation in those markets.
Keywords: Home bias, Local envy, Global stock market participation
JEL Classification: G11, G15, F30
Suggested Citation: Suggested Citation