Title; “The Geography of Beliefs” - Raman Uppal, Edhec Business School , joint work with Harjoat S. Bhamra and Johan Walden
Empirical evidence shows that beliefs of households deviate from rational expectations and instead may be influenced by characteristics such as place of residence, culture, and socioeconomic status, which can be modeled using network theory. We develop a model where a household's beliefs about stock returns are an endogenous outcome of its location in a bipartite network of households and firms. We use this model to establish the relation between households' beliefs about stock returns, which are unobservable, and the portfolio weights allocated to these stocks by these households. We use Finnish data for 126 firms and the portfolio holdings of 885,868 households to estimate our model and find that geographical distance in the network has a statistically and economically significant effect on the beliefs of households. Our estimates show that agents are connected to firms within a radius of about 145 miles from where they live, and geography has a strong effect on beliefs: a one standard deviation decrease in an agent's distance to a firm's headquarters predicts an increase in portfolio holdings by 165%.