Location Choice, Portfolio Choice

Ioannis Branikas, Harrison Hong, Jiangmin Xu

NBER Working Paper No. 23040
Issued in January 2017
NBER Program(s):Asset Pricing

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.

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Document Object Identifier (DOI): 10.3386/w23040

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