Local Economic Conditions and Local Equity Preferences: Evidence from Mutual Funds during the U.S. Housing Boom and Bust

48 Pages Posted: 7 Feb 2017

See all articles by Chandler Lutz

Chandler Lutz

Securities and Exchange Commission

Aleksandra Rzeźnik

York University, Schulich School of Business

Ben Sand

York University

Date Written: December 2016

Abstract

This paper examines the impact of local economic conditions on mutual fund preferences for geographically proximate stocks and consequently fund performance. Specifically, we demonstrate that mutual funds favouritism towards firms located within close geographic proximity varies with local housing price shocks. A decrease in local house prices is strongly associated with an increase in mutual fund home bias and results in a portfolio adjustment towards safer and higher quality holdings. This previously undocumented behavioral bias is of first order importance, as the shift in mutual fund preferences towards local stocks induced by deterioration in local economic conditions is associated with mutual fund underperformance: a one percentage point increase in home bias causes a decrease in a fund’s characteristic-adjusted 3-month future return by 35.3 bps.

Keywords: Home Bias, Investor Behaviour, Local Information Advantage, Non-Fundamental Information, House Prices

JEL Classification: F30, G15, G23

Suggested Citation

Lutz, Chandler and Rzeźnik, Aleksandra and Sand, Ben, Local Economic Conditions and Local Equity Preferences: Evidence from Mutual Funds during the U.S. Housing Boom and Bust (December 2016). Available at SSRN: https://ssrn.com/abstract=2912419 or http://dx.doi.org/10.2139/ssrn.2912419

Chandler Lutz

Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549
United States

Aleksandra Rzeźnik (Contact Author)

York University, Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Ben Sand

York University ( email )

4700 Keele St.
Toronto, Ontario M3J 1P3
Canada

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