Portfolio Diversification and City Agglomeration

William Goetzmann, Massimo Massa and Andrei Simonov

No 10343, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G11 G14 (search for similar items in EconPapers)
Date: 2004-03
New Economics Papers: this item is included in nep-fin, nep-rmg and nep-ure
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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