The Geography of Investment: Informed Trading and Asset Prices

Posted: 21 Aug 2001  

Joshua D. Coval

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Tobias J. Moskowitz

Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

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Abstract

Applying a geographic lens to mutual fund performance, this study finds that fund managers earn substantial abnormal returns in nearby investments. These returns are particularly strong among funds that are small and old, focus on few holdings, and operate out of remote areas. Furthermore, we find that while the average fund exhibits only a modest bias toward local stocks, certain funds strongly bias their holdings locally and exhibit even greater local performance. Finally, we demonstrate that the extent to which a firm is held by nearby investors is positively related to its future expected return. Our results suggest that investors trade local securities at an informational advantage and point toward a link between such trading and asset prices.

Suggested Citation

Coval, Joshua D. and Moskowitz, Tobias J., The Geography of Investment: Informed Trading and Asset Prices. Journal of Political Economy, Vol. 109, August 2001. Available at SSRN: https://ssrn.com/abstract=275343

Joshua D. Coval

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tobias J. Moskowitz (Contact Author)

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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