Hedging, Familiarity and Portfolio Choice

Posted: 29 Feb 2008

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Russian Presidential Academy of National Economy and Public Administration (RANEPA); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: 2006

Abstract

We exploit the restrictions of intertemporal portfolio choice in the presence of nonfinancial income risk to test hedging using the information contained in the actual portfolio of the investor. We use a unique data set of Swedish investors with information broken down at the investor level and into various components of investor wealth, income, and demographic characteristics. Portfolio holdings are identified at the stock level. We show that investors do not hedge but invest in stocks closely related to their nonfinancial income. We explain this with familiarity, that is, the tendency to concentrate holdings in stocks to which the investor is geographically or professionally close or that he has held for a long period. We show that familiarity is not a behavioral bias, but is information driven. Familiarity-based investment allows investors to earn higher returns than they would have otherwise earned if they had hedged.

Suggested Citation

Massa, Massimo and Simonov, Andrei, Hedging, Familiarity and Portfolio Choice ( 2006). The Review of Financial Studies, Vol. 19, Issue 2, pp. 633-685, 2006. Available at SSRN: https://ssrn.com/abstract=900718 or http://dx.doi.org/10.1093/rfs/hhj013

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

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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

Russian Presidential Academy of National Economy and Public Administration (RANEPA) ( email )

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Russia

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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