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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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    • Gómez is with the IE Business School, Madrid, Priestley is with the Department of Financial Economics, Norwegian School of Management, and Zapatero is with FBE, Marshall School of Business, USC. Gómez and Zapatero thank the Spanish MICINN for their generous support through research project number ECO2008-02333-RWC. We thank Limei Che and Dmitri Kantsyrev for excellent research assistance. Many helpful comments and suggestions from an anonymous referee are gratefully acknowledged. We also thank Ilan Cooper, Peter DeMarzo, Valery Polkovnichenko, Rosa Rodríguez, Tano Santos, Sergei Sarkissian, Robert Stambaugh (the Editor), Lucie Tepla, Raman Uppal, and Madhu Veeraraghavan for helpful comments. We would especially like to thank John Griffin, who generously provided us with the Datastream codes to collect the stock return data in the United Kingdom, Japan, and Germany. The usual caveat applies.


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.