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

This paper tests the cross-section implications of quot;keeping up with the Jonesesquot; (KUJ) preferences in an international setting. When agents have KUJ preferences, in the presence of un-diversifiable non-financial 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. Our test includes securities from the US, UK, Japan and Germany. In terms of explaining the cross-section of stocks returns and the size of the pricing errors, the model based on relative wealth concerns performs better than alternative international asset pricing models