Keeping up with the Joneses and optimal diversification

Moshe Levy; Haim Levy

doi:10.1016/j.jbankfin.2015.04.012

Keeping up with the Joneses and optimal diversification

Moshe Levy^*, Haim Levy

^*Corresponding author for this work

Business Administration

Research output: Contribution to journal › Article › peer-review

2 Scopus citations

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.

Original language	American English
Pages (from-to)	29-38
Number of pages	10
Journal	Journal of Banking and Finance
Volume	58
DOIs	https://doi.org/10.1016/j.jbankfin.2015.04.012
State	Published - 1 Sep 2015

Bibliographical note

Publisher Copyright:
© 2015 Elsevier B.V.

Keywords

Capital Asset Pricing Model (CAPM)
Correlation loving
Diversification
Keeping-up with the Joneses
Mean-variance efficiency analysis
Peer-effects
Stochastic dominance

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10.1016/j.jbankfin.2015.04.012

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title = "Keeping up with the Joneses and optimal diversification",

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.",

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AU - Levy, Moshe

AU - Levy, Haim

PY - 2015/9/1

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N2 - 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.

AB - 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.

KW - Capital Asset Pricing Model (CAPM)

KW - Correlation loving

KW - Diversification

KW - Keeping-up with the Joneses

KW - Mean-variance efficiency analysis

KW - Peer-effects

KW - Stochastic dominance

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M3 - Article

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SN - 0378-4266

VL - 58

SP - 29

EP - 38

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

ER -

Keeping up with the Joneses and optimal diversification

Abstract

Bibliographical note

Keywords

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