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Title:Measuring the effects of geographical distance on stock market correlation PDF Logo
Authors:Eckel, Stefanie
Löffler, Gunter
Maurer, Alina
Schmidt, Volker
Issue Date:2009
Series/Report no.:SFB 649 discussion paper 2009,025
Abstract:Recent studies suggest that the correlation of stock returns increases with decreasing geographical distance. However, there is some debate on the appropriate methodology for measuring the effects of distance on correlation. We modify a regression approach suggested in the literature and complement it with an approach from spatial statistics, the mark correlation function. For the stocks contained in the S&P 500 that we examine, both approaches lead to similar results: correlation increases with decreasing distance. Contrary to previous studies, however, we find that differences in distance do not matter much once the firms’ headquarters are more than 40 miles apart, or separated through a federal border. Finally, we show through simulations that distance can significantly affect portfolio risk. Investors wishing to exploit local information should be aware that local portfolios are relatively risky.
Subjects:stock returns
residual correlation
mark correlation function
geographical comovement
portfolio analysis
JEL:R12
G11
G14
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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