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Keeping, not catching, up with the Joneses: An international asset pricing model ∗

By Juan-pedro Gómez, Richard Priestley and O Zapatero


We derive an international asset pricing model that assumes local investorshavepreferencesofthetype“keepingupwiththeJoneses.” In an international setting investors compare their current wealth with that of their peers who live in the same country. In equilibrium, this gives rise to a multifactor CAPM where, together with the world market price of risk, there exists country-specific prices of risk associated with deviations from the country’s average wealth level. The model performs about fifty percent 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, the Fama and French HML factor and local interest rate factors

Year: 2003
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