Using a data set on the investments made by a large number of retail investors from 1991 to 1996, we find that households exhibit a strong preference for local investment - the average household invests nearly a third of their portfolio in firms headquartered within 250 miles. We test whether this locality bias is driven by information or by simple familiarity. The average household generates an additional return of 3.7% per year from its local holdings relative to its non-local holdings, suggesting local investors are able to exploit local knowledge. The excess return to investing locally is even larger among stocks not in the S&P 500 index (firms where informational asymmetries between local and non-local investors may be largest), while there is no excess return earned by households that invest in local S&P 500 stocks.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
9685.
Length: Date of creation: May 2003 Date of revision: Handle: RePEc:nbr:nberwo:9685
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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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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
William N. Goetzmann & Alok Kumar, 2008.
"Equity Portfolio Diversification,"
Review of Finance,
Oxford University Press for European Finance Association, vol. 12(3), pages 433-463.
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