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Investor sophistication and asset prices
Author(s) -
Korniotis George M.,
Kumar Alok,
Page Jeremy K.
Publication year - 2020
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1002/rfe.1093
Subject(s) - sophistication , capital asset pricing model , stock (firearms) , asset (computer security) , financial economics , population , economics , monetary economics , business , geography , social science , demography , computer security , archaeology , sociology , computer science
We show that geographical variation in the level of investor sophistication influences local asset prices. Investors in less sophisticated regions exhibit stronger trading correlations, and correspondingly, the returns of firms headquartered in less sophisticated areas are more strongly correlated. Furthermore, we show that local economic conditions have a greater ability to predict local stock returns in the U.S. states with less sophisticated retail investors. These asset pricing results are driven by the sophistication of actual local investors, and not by the characteristics of the broader local population.