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Location Choice, Portfolio Choice

Author

Listed:
  • Ioannis Branikas
  • Harrison Hong
  • Jiangmin Xu

Abstract

Households hold nondiversified stock portfolios of firms headquartered near their city of residence. Explanations assign a causal role for proximity, either in generating an informational advantage or a familiarity bias. Empirical analyses assume households locate randomly, even though they optimally select a city. This selection is important since latent location factors might be correlated with latent demand for local stocks. Building on location choice models from urban economics, we develop a Heckman (1977)-style model to account for the effect of location choices on portfolio choices. Adjusting for selection significantly reduces local bias and the performance of local stock picks.

Suggested Citation

  • Ioannis Branikas & Harrison Hong & Jiangmin Xu, 2017. "Location Choice, Portfolio Choice," NBER Working Papers 23040, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23040
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    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis
    • R22 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Other Demand

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