TY  - JOUR
AU  - Chan,Yeung Lewis
AU  - Kogan,Leonid
TI  - Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8607
PY  - 2001
Y2  - November 2001
UR  - http://www.nber.org/papers/w8607
L1  - http://www.nber.org/papers/w8607.pdf
N1  - Author contact info:
Leonid Kogan
MIT Sloan School of Management
100 Main Street, E62-636
Cambridge, MA  02142
Tel: 617/504-9728
Fax: 617/258-6855
E-Mail: lkogan@mit.edu
AB  - 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.
ER  -