Review of Finance 2026
Local Returns and Beliefs about the Stock Market
Abstract
We show that investors extrapolate from recent stock returns of locally headquartered firms when forming beliefs about aggregate stock market outcomes. While it may be optimal to rely on local information, these effects are unrelated to how informative local returns are on predictions of aggregate outcomes. Evidence from a sample of retail investors suggests this belief extrapolation is driven by investors’ own holdings of local firms. Our findings suggest that beliefs about information contained in public signals vary systematically with geography, and are an important component of local biases in equity markets.
- DOI
- 10.1093/rof/rfag051
- Language
- en
- Sources
- crossref