Keeping up with the Joneses and optimal diversification

Moshe Levy () and Haim Levy

Journal of Banking & Finance, 2015, vol. 58, issue C, 29-38

Abstract: Peer-effects have been shown to affect behavior, and can generally lead to investments choices that are mean–variance inefficient. This paper analyzes optimal diversification with peer-effects. We show that if individuals have keeping-up with the Joneses preferences and they take their peer-group reference as the market portfolio, Markowitz’s mean–variance efficiency analysis and the CAPM equilibrium are intact. This holds for any keeping-up preferences, as well as heterogeneous combinations of such preferences. These results also extend to the Merton–Levy segmented-market model.

Keywords: Diversification; Mean–variance efficiency analysis; Peer-effects; Keeping-up with the Joneses; Correlation loving; Capital Asset Pricing Model (CAPM); Stochastic dominance (search for similar items in EconPapers)
JEL-codes: D03 D81 G11 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:58:y:2015:i:c:p:29-38

DOI: 10.1016/j.jbankfin.2015.04.012

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