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Does geographic location matter to stock return predictability?

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  • Sabri Boubaker
  • Imed Chkir
  • Lamia Chourou
  • Samir Saadi

Abstract

Building on recent and growing evidence that geographic location influences information diffusion, this paper examines the relation between firm's location and the predictability of stock returns. We hypothesize that returns on a portfolio composed of firms located in central areas are more likely to follow a random walk than returns on a portfolio composed of firms located in remote areas. Using a battery of variance ratio tests, we find strong and robust support for our prediction. In particular, we show that the returns on a portfolio composed of the 500 largest urban firms follow a random walk; however, all variance ratio tests reject the random walk hypothesis for a portfolio that includes the 500 largest rural firms. Our results are robust to alternative definitions of firm's location and portfolio formation.

Suggested Citation

  • Sabri Boubaker & Imed Chkir & Lamia Chourou & Samir Saadi, 2019. "Does geographic location matter to stock return predictability?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 38(4), pages 311-326, July.
    • Handle: RePEc:wly:jforec:v:38:y:2019:i:4:p:311-326
    DOI: 10.1002/for.2556
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