Department of Economics,
Julis Romo Rabinowitz Building,
Princeton, NJ 08544
Institutional Affiliation: Princeton University
NBER Working Papers and Publications
|January 2017||Location Choice, Portfolio Choice|
with Harrison Hong, Jiangmin Xu: w23040
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.