Local Returns and Beliefs About the Stock Market

Tobin Hanspal, Clemens Wagner

Research

89 Pages

Hanspal and Wagner show investors extrapolate stock market beliefs from the recent returns of locally headquartered firms, even though local returns carry no extra predictive power for the aggregate market. German brokerage data trace the effect to investors’ own local stockholdings.

Key Takeaways

Local returns sway beliefs: A one-standard-deviation rise in local firm returns shifts U.S. survey respondents' market expectations by about 5% of one standard deviation.
Holdings drive the bias: German investors holding local firms within 10 km expect DAX returns 1.3 percentage points higher, against a 5.2% average.
Predictability doesn't matter: Extrapolation from local returns is unrelated to how well those returns actually predict the aggregate stock market.
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