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Agglomeration Economies and Local Comovement of Stock Returns

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  • Fu, Shihe
  • Shan, Liwei

Abstract

Existing studies in finance have documented the comovement of stock returns of companies headquartered in the same location. The interpretation is that local investors have a “local bias” due to an information advantage on local companies. This paper argues that localized agglomeration economies affect the fundamentals of local companies, resulting in the local comovement of stock returns. Using the data for China A-share listed companies from 1997-2007, we confirm the local comovement of stock returns of companies headquartered in the same city; moreover, the stock returns of a company headquartered in a city with stronger agglomeration economies are also correlated more highly with stock returns of other companies headquartered in the same city. The local comovement of earnings among companies headquartered in the same city is also found, and the local comovement of stock returns is correlated with the local comovement of earnings. We conclude that correlated local fundamentals due to localized agglomeration economies can explain the local comovement of stock returns.

Suggested Citation

  • Fu, Shihe & Shan, Liwei, 2011. "Agglomeration Economies and Local Comovement of Stock Returns," MPRA Paper 31887, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:31887
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    More about this item

    Keywords

    Stock returns; Local bias; Agglomeration economies;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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