Portfolio Diversification and City Agglomeration

41 Pages Posted: 16 Dec 2003  

Massimo Massa

INSEAD - Finance

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Gaidar Institute for Economic Policy; Centre for Economic Policy Research (CEPR); SITE

Multiple version iconThere are 2 versions of this paper

Date Written: June 2004

Abstract

We study the puzzle of portfolio underdiversification and proximity investment from a novel perspective, linking it to the process of urbanism. We find that urban portfolios are more focused - i.e., less diversified and more concentrated in "close" stocks - than urban portfolios. We explain it in terms of the process of "knowledge-spillover" that characterizes urban environments. We test this against a number of alternative theories: real and perceived informational advantage, local social competition and hedging of non-financial risk. We show that the very same factors behind the drive to city agglomeration also affect both the degree of portfolio diversification and proximity investing by influencing investor information and risk.

Keywords: Portfolio choice, under-diversification, proximity investment, knowledge spillover, city agglomeration

JEL Classification: G11, G14

Suggested Citation

Massa, Massimo and Goetzmann, William N. and Simonov, Andrei, Portfolio Diversification and City Agglomeration (June 2004). Yale ICF Working Paper No. 04-18; AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=472643 or http://dx.doi.org/10.2139/ssrn.472643

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

William N. Goetzmann

Yale School of Management - International Center for Finance ( email )

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P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5950 (Phone)
203-436-9252 (Fax)

HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management ( email )

645 N. Shaw Lane, 321 Eppley Center
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.andreisimonov.com

Gaidar Institute for Economic Policy ( email )

3-5 Gazetny Lane
Moscow, 125009
Russia

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

SITE ( email )

P.O. Box 6501
S-113 83 Stockholm, 11383
Sweden

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