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Does geographic location matter to stock return predictability?
Author(s) -
Boubaker Sabri,
Chkir Imed,
Chourou Lamia,
Saadi Samir
Publication year - 2019
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2556
Subject(s) - predictability , random walk , portfolio , econometrics , stock (firearms) , variance (accounting) , modern portfolio theory , random walk hypothesis , economics , financial economics , stock market , statistics , geography , mathematics , archaeology , context (archaeology) , accounting
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.