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

Juan Pedro Gomez ()
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Juan Pedro Gomez: Instituto de Empresa

Working Papers Economia from Instituto de Empresa, Area of Economic Environment

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.

Keywords: Local risk; Negative risk premium; Relative wealth concerns (search for similar items in EconPapers)
Pages: 28 pages
Date: 2008-02
New Economics Papers: this item is included in nep-fmk and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:emp:wpaper:wp08-12

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