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Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice, and Asset Prices

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  • Gali, Jordi

Abstract

The author studies the implications for optimal portfolio decisions and equilibrium asset prices of the hypothesis that agents care about other agents' consumption level (in addition to their own). That hypothesis is introduced in two settings: (1) a one-period CAPM model and (2) a multiperiod asset pricing model. The presence of externalities is shown to affect the optimal risky share, as well as the size of adjustments in the latter in response to exogenous changes in the risk-adjusted equity premium. In equilibrium, the equity premium is also affected by the sign and the intensity of the externalities. Copyright 1994 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 26 (1994)
Issue (Month): 1 (February)
Pages: 1-8

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Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:1:p:1-8

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Models aren't Theories
    by Eric Falkenstein in Falkenblog on 2009-12-27 04:00:00
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