Neighborhood Effect on Stock Price Comovement

North American Journal of Economics and Finance, Vol. 35, Pp. 1-22, 2016

Posted: 13 Jul 2016

See all articles by Mingsheng Li

Mingsheng Li

Bowling Green State University - College of Business Administration

Zhao Xin

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: July 12, 2016

Abstract

We investigate how the geographic distance between firms’ headquarters affects their stock price comovement. Our results show that a firm’s stock return has stronger comovement with the returns of nearby firms than with those of distant firms. Being in the same state and/or in the same industry strengthens the return comovement, but does not substitute for the negative effect of geographic distance on price comovement. Firms of similar share price and size also show stronger return comovement, but these factors do not mitigate the negative distance impact. Consistent with investor home bias and neighborhood effect literature, our results suggest that investors’ preference for local stocks and their interactions lead to correlated trading in local stocks and therefore stronger local price comovement.

Keywords: Price Co-movement; Local Bias; Asset Category; Geographic Proximity; Social Interaction; Investor Behavior

JEL Classification: G10, G12

Suggested Citation

Li, Mingsheng and Xin, Zhao, Neighborhood Effect on Stock Price Comovement (July 12, 2016). North American Journal of Economics and Finance, Vol. 35, Pp. 1-22, 2016. Available at SSRN: https://ssrn.com/abstract=2808552

Mingsheng Li (Contact Author)

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Zhao Xin

Independent ( email )

No Address Available
United States

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