Neighborhood effect on stock price comovement

Mingsheng Li, Xin Zhao

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)1-22
Number of pages22
JournalNorth American Journal of Economics and Finance
Volume35
DOIs
StatePublished - Jan 1 2016

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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