Abstract:

This paper examines the relationship between firm location and monthly return correlations of Borsa Istanbul’s stocks during the period between January 2005 and September 2011. These firms are also included in Borsa Istanbul (BIST) City Indices. Following Pirinsky and Wang (2006) model, we find similar results which show that stock returns of firms show a strong degree of co-movement with stock returns of other firms located in the same city. In our analysis, we also try to explain local comovement with financial sophistication and foreign investors. As the ratio of equity investors to population for city increases, local comovement also increases. Similarly, as the ratio of institutional equity investors to total equity investors for city increases, local comovement also increases. Although insignificant, when the ratio of foreign equity investors to total equity investors for each stock increases local comovement decreases. Our results are consistent with prior literature. Location is an important determinant of stock returns for BIST and this information is important for portfolio diversification.

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