Individualism, Uncertainty Avoidance and the Profitability of Momentum Strategies in International Markets

65 Pages Posted: 2 Apr 2010 Last revised: 22 Apr 2010

See all articles by Yiwen (Paul) Dou

Yiwen (Paul) Dou

Macquarie University

Cameron Truong

Monash University; Financial Research Network (FIRN)

Madhu Veeraraghavan

T.A. PAI Management Institute, Finance Area

Date Written: April 1, 2010

Abstract

Prior research shows that momentum returns are unlikely to be explained by risk-based theories. Daniel, Hirshleifer, and Subrahmanyam (1998) show that momentum effect can be explained by investors overconfidence and self-attribution bias while Barberis, Shleifer, and Vishny (1998) and Hong and Stein (1999) document that momentum effect can be explained by investors under-reaction to information. Chui et al. (2010) document that cultural differences influence the returns of momentum strategies. Motivated by these studies, we examine the relationship between cognitive biases and the profitability of price and earnings momentum strategies in international markets. Specifically, we address two questions. First, we investigate the relationship between individualism, uncertainty avoidance and price momentum returns. Second, we investigate the relationship between individualism, uncertainty avoidance and earnings momentum returns. Using data from 41 countries we show that (1) the level of individualism in different countries is positively associated with the profitability of price and earnings momentum strategies, (2) the degree of uncertainty avoidance is negatively associated with the earnings momentum profits, but not correlated with price momentum profits. Collectively, our findings suggest that the variation in the profitability of price and earnings momentum strategies can be attributed to cognitive biases.

Keywords: Post-earnings announcement drift, Individualism, Price momentum, Earnings Momentum, Uncertainty avoidance, Culture

JEL Classification: G12, G14, G15

Suggested Citation

Dou, Yiwen (Paul) and Truong, Cameron and Veeraraghavan, Madhu, Individualism, Uncertainty Avoidance and the Profitability of Momentum Strategies in International Markets (April 1, 2010). Available at SSRN: https://ssrn.com/abstract=1582767 or http://dx.doi.org/10.2139/ssrn.1582767

Yiwen (Paul) Dou

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Cameron Truong

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Madhu Veeraraghavan (Contact Author)

T.A. PAI Management Institute, Finance Area ( email )

Bangalore
Manipal, Karnataka 576104
India
+91-820-2701030 (Phone)

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