Department of Finance
Guanghua School of Management
Institutional Affiliation: Princeton University
NBER Working Papers and Publications
|January 2017||Location Choice, Portfolio Choice|
with Ioannis Branikas, Harrison Hong: 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.
|December 2016||Climate Risks and Market Efficiency|
with Harrison Hong, Frank Weikai Li: w22890
We investigate whether stock markets efficiently price risks brought on or exacerbated by climate change. We focus on drought, the most damaging natural disaster for crops and food-company cash flows. We show that prolonged drought in a country, measured by the Palmer Drought Severity Index (PDSI) from climate studies, forecasts both declines in profitability ratios and poor stock returns for food companies in that country. A portfolio short food stocks of countries in drought and long those of countries not in drought generates a 9.2% annualized return from 1985 to 2015. This excess predictability is larger in countries having little history of droughts prior to the 1980s. Our findings support regulatory concerns of markets inexperienced with climate change underreacting to such risks.
Published: Harrison Hong & Frank Weikai Li & Jiangmin Xu, 2018. "Climate risks and market efficiency," Journal of Econometrics, .