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

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  • JUAN-PEDRO GÃMEZ
  • RICHARD PRIESTLEY
  • FERNANDO ZAPATERO

Abstract

This paper tests the cross-sectional implications of "keeping-up-with-the-Joneses" (KUJ) preferences in an international setting. When agents have KUJ preferences, in the presence of undiversifiable nonfinancial 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. In terms of explaining the cross-section of stock returns and the size of the pricing errors, the model performs better than alternative international asset pricing models. Copyright (c) 2009 the American Finance Association.

Suggested Citation

  • Juan-Pedro Gãmez & Richard Priestley & Fernando Zapatero, 2009. "Implications of Keeping-Up-with-the-Joneses Behavior for the Equilibrium Cross Section of Stock Returns: International Evidence," Journal of Finance, American Finance Association, vol. 64(6), pages 2703-2737, December.
  • Handle: RePEc:bla:jfinan:v:64:y:2009:i:6:p:2703-2737
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    Cited by:

    1. Wang, Jianxin & Yang, Minxian, 2013. "On the risk return relationship," Journal of Empirical Finance, Elsevier, vol. 21(C), pages 132-141.
    2. Victoria Atanasov, 2014. "Common Risk Factors in Equity Markets," Tinbergen Institute Discussion Papers 14-070/IV, Tinbergen Institute.
    3. Alexander Alekseev & Mikhail Sokolov, 2016. "Portfolio Return Relative to a Benchmark," EUSP Department of Economics Working Paper Series Ec-04/16, European University at St. Petersburg, Department of Economics.
    4. Aleksandr G. Alekseev & Mikhail V. Sokolov, 2016. "Benchmark-based evaluation of portfolio performance: a characterization," Annals of Finance, Springer, vol. 12(3), pages 409-440, December.
    5. repec:eee:jeborg:v:140:y:2017:i:c:p:197-223 is not listed on IDEAS
    6. Mugerman, Yevgeny & Sade, Orly & Shayo, Moses, 2014. "Long term savings decisions: Financial reform, peer effects and ethnicity," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 235-253.
    7. Johnson, Timothy C., 2012. "Inequality risk premia," Journal of Monetary Economics, Elsevier, vol. 59(6), pages 565-580.
    8. Ioannis Branikas & Harrison Hong & Jiangmin Xu, 2017. "Location Choice, Portfolio Choice," NBER Working Papers 23040, National Bureau of Economic Research, Inc.
    9. Levy, Moshe & Levy, Haim, 2015. "Keeping up with the Joneses and optimal diversification," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 29-38.
    10. Li, Donghui & Liao, Li & Luo, Yuanhang & Zhang, Xueyong, 2014. "Firm headquarters location, ownership structure, and stock return co-movements," Pacific-Basin Finance Journal, Elsevier, vol. 30(C), pages 158-172.

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