We derive an international asset pricing model that assumes local investors
have preferences of the type "keeping up with the Joneses." In an
international setting investors compare their current wealth with that of
their peers who live in the same country. In the process of inferring the
country's average wealth, investors incorporate information from the domestic
market portfolio. In equilibrium, this gives rise to a multifactor CAPM
where, together with the world market price of risk, there exists
country-speciffic ...
We derive an international asset pricing model that assumes local investors
have preferences of the type "keeping up with the Joneses." In an
international setting investors compare their current wealth with that of
their peers who live in the same country. In the process of inferring the
country's average wealth, investors incorporate information from the domestic
market portfolio. In equilibrium, this gives rise to a multifactor CAPM
where, together with the world market price of risk, there exists
country-speciffic prices of risk associated with deviations from the
country's average wealth level. The model performs signifficantly 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 and
the Fama and French HML factor.
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