Working Paper: NBER ID: w10343
Authors: William N. Goetzmann; Massimo Massa; Andrei Simonov
Abstract: We relate the degree of investor portfolio focus to the broader urban economic context of the household. Using a detailed panel of investors in Sweden over the period 1995 to 2000, we find that the level of investor diversification, as measured by number of stocks in the portfolio and by the average correlation among holdings, is partially explained by city industrial characteristics. We find that rural portfolios are more diversified than urban portfolios and that portfolio diversification is characterized by factors associated with urban growth. We consider a number of theories to explain investor focus, including behavioral biases, real and perceived informational advantage, local social competition and hedging of non-tradable risk. We find little evidence to support social and hedging motives to explain the lack of portfolio diversification, and some evidence in favor of perceived informational advantage in an urban setting. We attribute this evidence as support for the broader 'knowledge spillover' processes documented in the recent urban economics literature. Portfolio effects may be added to the list of factors that define and differentiate urbanism.
Keywords: portfolio diversification; city agglomeration; urban economics
JEL Codes: G11; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| urban industrial concentration (R11) | portfolio focus (G11) |
| local competition (L13) | portfolio diversification (G11) |
| industry specialization (L89) | portfolio diversification (G11) |
| local prosperity (R11) | portfolio diversification (G11) |
| professional specialization (J44) | stock market participation (G10) |
| professional specialization (J44) | portfolio diversification (G11) |
| urban growth factors (R11) | risk-taking in investment portfolios (G11) |
| isolation from urban centers (R59) | portfolio diversification (G11) |
| knowledge spillover (O36) | risk-taking behavior (D91) |