Long Georgia, Short Colorado? The Geography of Return Predictability

55 Pages Posted: 17 Jan 2009

See all articles by George M. Korniotis

George M. Korniotis

University of Miami; Miami Business School; University of Miami - Behavioral Decision Making Cluster

Alok Kumar

University of Miami - Miami Herbert Business School

Date Written: January 16, 2009

Abstract

This study investigates whether local stock returns vary with local business cycles in a predictable manner. We conjecture that, in the presence of local bias and incomplete risk sharing, local macroeconomic variables that characterize local business cycles would predict the returns of local stocks. In particular, during local economic recessions, the average returns of local stocks would increase as local risk aversion increases and the ability of local investors to smooth consumption declines. Consistent with this conjecture, we find that U.S. state portfolios earn higher (lower) returns when state-level unemployment rates are higher (lower) and state investors face stronger (weaker) borrowing constraints. During the 1980-2004 period, trading strategies that exploit this state-level predictability earn annualized risk-adjusted return of over 7 percent. The evidence of predictability is stronger among less visible firms and in regions in which investors exhibit stronger local bias and hold more concentrated portfolios. Overall, our results indicate that the stock return generating process contains a predictable local component.

Keywords: Local Bias, U.S. States, Time-varing Risk Sharing and Risk Aversion

JEL Classification: C23, E17, G12

Suggested Citation

Korniotis, George M. and Kumar, Alok, Long Georgia, Short Colorado? The Geography of Return Predictability (January 16, 2009). Available at SSRN: https://ssrn.com/abstract=1328973 or http://dx.doi.org/10.2139/ssrn.1328973

George M. Korniotis (Contact Author)

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-5728 (Phone)

Miami Business School ( email )

University of Miami - Behavioral Decision Making Cluster ( email )

5250 University Drive
Coral Gables, FL 33124
United States

Alok Kumar

University of Miami - Miami Herbert Business School ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
99
Abstract Views
617
rank
20,085
PlumX Metrics