Portfolio Diversification and City Agglomeration
41 Pages Posted: 16 Dec 2003
Date Written: June 2004
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: Suggested Citation