Working Paper: CEPR ID: DP4786
Authors: William Goetzmann; Massimo Massa; Andrei Simonov
Abstract: We study the puzzle of portfolio underdiversification and proximity investment from a novel perspective, linking it to the process of urbanization. We find that urban portfolios are more focused ? i.e., less diversified and more concentrated in ?close? stocks. We explain it in terms of the process of ?professional specialization? that characterizes urban environments. We test this against a number of alternative theories: financial sophistication, social competition and hedging non-financial risk. We show that the very same factors behind the drive to city agglomeration also affect both the degree of portfolio diversification and proximity investing by influencing investor information and risk.
Keywords: city agglomeration; portfolio choice; professional specialization; proximity investment; underdiversification
JEL Codes: G11; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Professional specialization (J44) | Portfolio diversification (G11) |
| Urban investors (R21) | Proximity investment (G11) |
| Local prosperity (R11) | Portfolio diversification (G11) |
| Local prosperity (R11) | Proximity investment (G11) |
| Higher competition in local industry (L19) | Proximity investment (G11) |
| Higher competition in local industry (L19) | Portfolio diversification (G11) |
| Financial sophistication (G53) | Portfolio diversification (G11) |
| Hedging nonfinancial risk (G19) | Portfolio diversification (G11) |