I examine the impact of status-seeking considerations on investors ’ portfolio choices and asset prices in a general equilibrium setting. The economy I study consists of traditional (“Markowitz”) investors as well as status-seekers who are concerned about relative wealth. The model highlights the strategic and interdependent nature of portfolio selection in such a setting: low-status investors look for portfolio choices that maximize their chances of moving up the ladder while high-status investors look to maintain the status quo and hedge against these choices of the low-status investors. In equilibrium, asset returns obey a novel two-factor model in which one factor is the traditional market factor and the other is a particular “high volatility factor ” that does not appear to have been identified so far in the theoretical or empirical literature. I test this two-factor model using stock market data and find significant support for it. Of particular interest, the model and the empirical results attribute the low returns on idiosyncratic volatility stocks documented by Ang, Hodrick, Xing and Zhang (2006) to their covariance with the portfolio of highly volatile stocks held by investors with relatively low status.

Beyond product markets: new insight on liability of foreignness from capital markets

This paper develops a simple endogenous growth model of human capital accumula-tion with social status effects. These include status from job quality, as indicated by their relative level of education, as well as ‘keeping up with the Joneses ’ in consump-tion. Symmetrically held, social aspirations increase growth, but possibly to a sub-optimally high level. Under heterogeneity, we show that growth and inequality are negatively related. We distinguish between ‘average ’ and ‘differential ’ status effects, and point out the difference in the effects on growth and equality between these two classes. Within the ‘differential ’ effects class, any rise in ‘gains from ’ and decrease in ‘pains from the lack of ’ status from either consumption and/or job quality would decrease mean hours in education, growth, and increase inequality.