Neighborhood effect on stock price comovement

Mingsheng Li and Xin Zhao

The North American Journal of Economics and Finance, 2016, vol. 35, issue C, 1-22

Abstract: We investigate how the geographic distance between firms’ headquarters affects their stock price comovement. Our results show that a firm's stock return has stronger comovement with the returns of nearby firms than with those of distant firms. Being in the same state and/or in the same industry strengthens the return comovement, but does not substitute for the negative effect of geographic distance on price comovement. Firms of similar share price and size also show stronger return comovement, but these factors do not mitigate the negative distance impact. Consistent with investor home bias and neighborhood effect literature, our results suggest that investors’ preference for local stocks and their interactions lead to correlated trading in local stocks and therefore stronger local price comovement.

Keywords: Price comovement; Local bias; Asset category; Geographic proximity; Social interaction; Investor behavior (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:35:y:2016:i:c:p:1-22

DOI: 10.1016/j.najef.2015.10.002

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