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Portfolio Diversification and City Agglomeration

48 Pages Posted: 16 Mar 2004 Last revised: 16 Feb 2005

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

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Date Written: March 2004

Abstract

We relate the degree of investor portfolio focus to the broader urban economic context of the household. Using a detailed panel of investors in Sweden over the period 1995 to 2000, we find that the level of investor diversification, as measured by number of stocks in the portfolio and by the average correlation among holdings, is partially explained by city industrial characteristics. We find that rural portfolios are more diversified than urban portfolios and that portfolio diversification is characterized by factors associated with urban growth. We consider a number of theories to explain investor focus, including behavioral biases, real and perceived informational advantage, local social competition and hedging of non-tradable risk. We find little evidence to support social and hedging motives to explain the lack of portfolio diversification, and some evidence in favor of perceived informational advantage in an urban setting. We attribute this evidence as support for the broader 'knowledge spillover' processes documented in the recent urban economics literature. Portfolio effects may be added to the list of factors that define and differentiate urbanism.

Suggested Citation

Massa, Massimo and Goetzmann, William N. and Simonov, Andrei, Portfolio Diversification and City Agglomeration (March 2004). NBER Working Paper No. w10343. Available at SSRN: https://ssrn.com/abstract=515237

Massimo Massa

INSEAD - Finance ( email )

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William Goetzmann (Contact Author)

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

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National Bureau of Economic Research (NBER)

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Andrei Simonov

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

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United States

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

Gaidar Institute for Economic Policy ( email )

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Moscow, 125009
Russia

Centre for Economic Policy Research (CEPR) ( email )

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London, EC1V 3PZ
United Kingdom

SITE ( email )

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

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