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 |
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Pages (from-to) | 29-38 |
Number of pages | 10 |
Journal | Journal of Banking and Finance |
Volume | 58 |
DOIs | |
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