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.
Bibliographical notePublisher Copyright:
© 2015 Elsevier B.V.
- Capital Asset Pricing Model (CAPM)
- Correlation loving
- Keeping-up with the Joneses
- Mean-variance efficiency analysis
- Stochastic dominance