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Location choice, portfolio choice

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  • Branikas, Ioannis
  • Hong, Harrison
  • Xu, Jiangmin

Abstract

Households hold undiversified stock portfolios of firms headquartered near their city of residence. Leading explanations assign a causal role for proximity. The literature neglects that distance is endogenous. Households may locate based on unobservables such as optimism about a city’s economic prospects, which can be correlated with latent local-stock demand. We use location-choice models to account for this selection. We propose as instruments that older households prefer to locate in recreational areas for non-pecuniary reasons. Our analysis based on a widely used household data set yields significantly smaller estimates for proximity in determining portfolio choice compared to those in the literature.

Suggested Citation

  • Branikas, Ioannis & Hong, Harrison & Xu, Jiangmin, 2020. "Location choice, portfolio choice," Journal of Financial Economics, Elsevier, vol. 138(1), pages 74-94.
    • Handle: RePEc:eee:jfinec:v:138:y:2020:i:1:p:74-94
    DOI: 10.1016/j.jfineco.2019.10.010
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    More about this item

    Keywords

    Location choice; Portfolio choice; Household finance; Local bias; Selection correction;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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