Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices

Posted: 5 Dec 2002

See all articles by Yeung Lewis Chan

Yeung Lewis Chan

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

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Abstract

We analyze a general equilibrium exchange economy with a continuum of agents who have "catching up with the Joneses" preferences and differ only with respect to the curvature of their utility functions. While individual risk aversion does not change over time, dynamic redistribution of wealth among the agents leads to countercyclical time variation in the Sharpe ratio of stock returns. We show that both the conditional risk premium and the return volatility are negatively related to the level of stock prices. Therefore, our model exhibits many of the empirically observed properties of aggregate stock returns, for example, patterns of autocorrelation in returns, the "leverage effect" in return volatility, and long-horizon return predictability.

Suggested Citation

Chan, Yeung Lewis and Kogan, Leonid, Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices. Journal of Political Economy, No. 110, December 2002. Available at SSRN: https://ssrn.com/abstract=348782

Yeung Lewis Chan

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

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Leonid Kogan (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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