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Portfolio Diversification, Proximity Investment and City Agglomeration

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Author Info
Goetzmann, William
Massa, Massimo
Simonov, Andrei

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Abstract

We study the puzzle of portfolio underdiversification and proximity investment from a novel perspective, linking it to the process of urbanization. We find that urban portfolios are more focused – i.e., less diversified and more concentrated in ‘close’ stocks. We explain it in terms of the process of ‘professional specialization’ that characterizes urban environments. We test this against a number of alternative theories: financial sophistication, social competition and hedging non-financial risk. We show that the very same factors behind the drive to city agglomeration also affect both the degree of portfolio diversification and proximity investing by influencing investor information and risk.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4786.

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Date of creation: Dec 2004
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Handle: RePEc:cpr:ceprdp:4786

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Related research
Keywords: city agglomeration; portfolio choice; professional specialization; proximity investment; under-diversification;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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  1. Christiansen, Charlotte & Joensen, Juanna Schröter & Rangvid, Jesper, 2005. "Do More Economists Hold Stocks?," Finance Research Group Working Papers F-2005-02, University of Aarhus, Aarhus School of Business, Department of Business Studies. [Downloadable!]
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