Does geographic location matter to stock return predictability?. (23rd October 2018)

• Record Type: Journal Article
• Authors: Boubaker, Sabri; Chkir, Imed; Chourou, Lamia; Saadi, Samir
• Is Part Of: Journal of forecasting. Volume 38:Number 4(2019)
• Page Start: 311
• Page End: 326
• Publication Date: 2018-10-23
• Subjects: geographic location -- information asymmetry -- market efficiency -- predictability of stock returns -- random walk -- variance ratio; Forecasting -- Periodicals; Forecasting -- Mathematical models -- Periodicals; 003.2
• DOI: 10.1002/for.2556
• Languages: English
• ISSNs: 0277-6693

Abstract

Abstract: Building on recent and growing evidence that geographic location influences information diffusion, this paper examines the relation between firm's location and the predictability of stock returns. We hypothesize that returns on a portfolio composed of firms located in central areas are more likely to follow a random walk than returns on a portfolio composed of firms located in remote areas. Using a battery of variance ratio tests, we find strong and robust support for our prediction. In particular, we show that the returns on a portfolio composed of the 500 largest urban firms follow a random walk; however, all variance ratio tests reject the random walk hypothesis for a portfolio that includes the 500 largest rural firms. Our results are robust to alternative definitions of firm's location and portfolio formation.