No abstract

No abstract

No abstract

We analyze the effect of geographic proximity on individual investors' portfolio choice.Using a unique data set which covers the common stockholdings of private households at regional banks in Germany, we document strong and consistent overinvestment in geographically close companies. Our results conclusively reject the presence of an informational advantage ('home-field advantage') of local over non-local investors. Instead, households' preference for local equity turns out to be familiarity-driven. We conclude that individual investors' local bias is induced by ambiguity aversion in the portfolio selection process rather than a trading strategy based on superior information about local companies. Keywords:Local bias, portfolio diversification, household finance, investor behaviour, ambiguity aversion JEL-Classification: G01, G11, G14 Several contributions to the local bias literature suggest that households' overweight in geographically close stocks reflects informed (i.e. rational) investment decisions which is based on an information advantage in evaluating nearby companies (informa- tion hypothesis).Yet, empirical evidence on informational advantages as the trigger for investors' local bias is mixed and a variety of studies indicate that local bias, quite on the contrary, is actually detrimental to investor welfare. If this is the case, understanding the root cause of local bias is particularly important since it provides the basis for reducing the welfare costs of this investment mistake. As such, a number of studies in the field soften or even reject the information hypothesis and instead advocate that local bias is the result of investors' preference to invest in the familiar. However, due to the lack of a comprehensive analytical framework, these studies cannot explain exactly how investors' familiarity with an asset actually affects local bias.Following a theoretical concept by Boyle et al (2011), this paper investigates whether local bias can be explained when incorporating familiarity towards stocks (and issuing companies) as an additional dimension to the information-based portfolio selection process. Our research is based on the Security Deposits Statistics maintained by Deutsche Bundesbank which collects the common stockholdings of retail customers atGerman regional banks on a security-by-security basis and allows specifying the geographical proximity between investor and company headquarters.We find that, indeed, private households in Germany significantly overweight nearby stocks and show that this result is robust across a number of different breakdowns.Second, we investigate whether the observed portfolio locality is information-

No abstract