Location Choice, Portfolio Choice
NBER Working Paper No. 23040
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.
Document Object Identifier (DOI): 10.3386/w23040
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