Individualism and Momentum around the World

50 Pages Posted: 24 Mar 2005  

Andy C.W. Chui

Hong Kong Polytechnic University

K.C. John Wei

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: March 12, 2005

Abstract

This paper examines the extent to which cultural differences affect stock return patterns. Our tests are based on an index constructed by Hofstede (2001), which measures the degree of individualism across countries. As we argue, individualism is likely to be positively associated with a variety of cognitive biases that have been discussed in the behavioral finance literature. Our analysis indicates that trading volume is higher in more individualistic cultures, which is consistent with the hypothesis that individualism is related to overconfidence/self-attribution bias. We also find that the individualism is related to momentum, which is consistent with existing behavioral theories. This finding continues to hold, after controlling for other country-level variables that are likely to proxy for the efficiency of capital markets, such as the legal protection of investors and the quality of accounting standards. Finally, we find that long-term reversals are significantly related to mid-term continuations and tend to be stronger in more individualistic cultures, which is also consistent with the prediction of existing behavioral models.

Keywords: International momentum, Individualistic cultures, Collectivistic cultures, Overconfidence, Self-attribution bias, Behavioral finance

JEL Classification: C13, C53, G14

Suggested Citation

Chui, Andy C.W. and Wei, K.C. John and Titman, Sheridan, Individualism and Momentum around the World (March 12, 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=685767 or http://dx.doi.org/10.2139/ssrn.685767

Andy Chun Wai Chui

Hong Kong Polytechnic University ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong
(852)2 766 7105 (Phone)
(852) 2 765-0611 (Fax)

Kuo-Chiang (John) Wei (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

School of Accounting and Finance
Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong
852 2766 4953 (Phone)
852 2330 9845 (Fax)

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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