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The effect of relative wealth concerns on the cross-section of stock returns

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  • JUAN PEDRO GOMEZ

    () (Instituto de Empresa)

Abstract

There are several economic reasons why investors might want to hedge local risk resulting from relative wealth concerns; namely, keeping up with the Joneses preferences and competition for local assets in short supply. In equilibrium, hedging for these purposes results in a negative risk Premium for the local risk factors. We study the empirical implications of this equilibrium at the level of the nine US census divisions. As a proxy for the local risk factor we use regional labor income growth. In explaining the cross-section of stock returns, the model performs substantially better than the CAPM, and as well as the Fama-French three factor model.

Suggested Citation

  • Juan Pedro Gomez, 2008. "The effect of relative wealth concerns on the cross-section of stock returns," Working Papers Economia wp08-12, Instituto de Empresa, Area of Economic Environment.
  • Handle: RePEc:emp:wpaper:wp08-12
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    Keywords

    Local risk; Negative risk premium; Relative wealth concerns;

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