Individualism and Momentum Around the World
71 Pages Posted: 23 Jun 2008 Last revised: 25 Feb 2009
Date Written: February 23, 2009
This paper examines the extent to which cultural differences influence the returns of momentum strategies. We measure cultural differences using an index of individualism developed by Hofstede (2001), which we argue is related to overconfidence and self-attribution bias. Our cross-country evidence indicates that individualism is positively associated with trading volume and volatility, and is strongly related to the magnitude of momentum profits. The evidence also indicates that momentum profits are positively related to the dispersion of analyst forecasts, transaction costs, and the familiarity of a market to foreign investors, and negatively related to firm size and stock volatility. However, the addition of these and other variables does not dampen the relation between individualism and momentum profits. These results are robust to whether or not East Asian countries, which exhibit less momentum, are included in our sample. Finally, consistent with the prediction of behavioral models, momentum profits reverse one year after portfolio formation in most countries, and the magnitude of the reversals tends to be higher in countries with higher individualism.
Keywords: International momentum, Individualism, Overconfidence, Volatility, Trading volume
JEL Classification: G12, G15, K22, Z10
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