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Keeping up with the Joneses: An international asset pricing model

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  • Juan-Pedro Gómez
  • Richard Priestly
  • Fernando Zapatero

Abstract

We derive an international asset pricing model that assumes local investors have preferences of the type "keeping up with the Joneses." In an international setting investors compare their current wealth with that of their peers who live in the same country. In the process of inferring the country's average wealth, investors incorporate information from the domestic market portfolio. In equilibrium, this gives rise to a multifactor CAPM where, together with the world market price of risk, there exists country-speciffic prices of risk associated with deviations from the country's average wealth level. The model performs signifficantly better, in terms of explaining cross-section of returns, than the international CAPM. Moreover, the results are robust, both for conditional and unconditional tests, to the inclusion of currency risk, macroeconomic sources of risk and the Fama and French HML factor.

Suggested Citation

  • Juan-Pedro Gómez & Richard Priestly & Fernando Zapatero, 2003. "Keeping up with the Joneses: An international asset pricing model," Economics Working Papers 694, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:694
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    1. Cyn-Young Park & Rogelio V. Mercado, 2014. "Equity home bias, financial integration, and regulatory reforms: implications for emerging Asia," Chapters, in: Iwan J. Azis & Hyun S. Shin (ed.), Global Shock, Risks, and Asian Financial Reform, chapter 9, pages 347-376, Edward Elgar Publishing.
    2. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2007. "Home bias in global bond and equity markets: The role of real exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 631-655, June.

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    More about this item

    Keywords

    Consumption externalities; multifactor asset pricing model;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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