Abstract
When markets’ volatility surges, financial integration drops. This may reflect an increase in international barriers, wealth effects, or rather an increase in the preference for geographically close investments. Since such preference for local stocks also applies to portfolios of domestic stocks, we exploit the domestic portfolios of US mutual funds to provide microeconomic evidence that investors are more likely to liquidate geographically remote investments at times of high aggregate market volatility. This has important implications for asset prices. The valuations of stocks with ex ante less local ownership decline more when aggregate market volatility is high. Furthermore, the returns of stocks with geographically distant owners are more exposed to changes in aggregate market volatility. As a consequence, it appears that local ownership can mitigate the effects of market-wide shocks.
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