Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices / Yeung Lewis Chan, Leonid Kogan.

Format:

Book

Author/Creator:

Chan, Yeung Lewis.

Contributor:

National Bureau of Economic Research.

Kogan, Leonid.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8607.

NBER working paper series no. w8607

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Catching Up with the Joneses

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

We analyze a general equilibrium exchange economy with a continuum of agents who have 'catching up with the Joneses' preferences and differ only with respect to the curvature of their utility functions. While individual risk aversion does not change over time, dynamic redistribution of wealth among the agents leads to countercyclical time variation in the Sharpe ratio of stock returns. We show that both the conditional risk premium and the return volatility are negatively related to the level of stock prices, as observed empirically. Therefore, our model exhibits many of the empirically observed properties of aggregate stock returns, e.g., patterns of autocorrelation in returns, the 'leverage effect' in return volatility and long-horizon return predictability. For comparison, otherwise similar representative agent economies with the same type of preferences exhibit counter-factual behavior, e.g., a constant Sharpe ratio of returns and procyclical risk premium and return volatility.

Notes:

Print version record

November 2001.