Keeping , not catching , up with the Joneses : An international asset pricing model ∗

We derive an international asset pricing model that assumes 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. Investors value domestic assets because they are more highly correlated with the domestic benchmark. In equilibrium, this gives rise to a multifactor CAPM where, together with the world market price of risk, there exists country-specific prices of risk associated with deviations from the country’s average wealth level. Unconditional and conditional empirical tests provide strong support for the theoretical model. The model has implications for the pricing of assets that are traded internationally and the home bias puzzle. JEL Codes: G15, G12, G11. ∗We thank Sergei Sarkissian for his comments. The usual caveat applies. †Norwegian School of Management and Universitat Pompeu Fabra. E-mail: [email protected] ‡Corresponding author, Department of Financial Economics, Norwegian School of Management, Elias smiths vei 15, N3102, Sandvika, Norway. Tel + 47 67557104, Fax: + 47 67557675. E-mail: [email protected] §FBE, Marshall School of Business, USC. E-mail: [email protected]