Neighborhood Effect on Stock Price Comovement

North American Journal of Economics and Finance, January 2016, 35, 1-22

Posted: 11 Dec 2017

See all articles by Mingsheng Li

Mingsheng Li

Bowling Green State University - College of Business Administration

Xin Zhao

Pennsylvania State University (Erie) - The Behrend College

Multiple version iconThere are 2 versions of this paper

Date Written: December 7, 2014

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 comovement; Local Bias; Asset Category; Geographic Proximity; Social Interaction; Investor Behavior

JEL Classification: G10, G12

Suggested Citation

Li, Mingsheng and Zhao, Xin Jessica, Neighborhood Effect on Stock Price Comovement (December 7, 2014). North American Journal of Economics and Finance, January 2016, 35, 1-22. Available at SSRN: https://ssrn.com/abstract=3084283

Mingsheng Li (Contact Author)

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

Bowling Green, OH 43403
United States

Xin Jessica Zhao

Pennsylvania State University (Erie) - The Behrend College ( email )

286 Burke
Erie, PA 16563-1400
United States

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