Individualism and Momentum around the World

摘要

This paper examines the extent to which cultural differences influence the returns of momentum strategies. We measure cultural differences using an index developed by Hofstede (2001), which measures the degree of individualism across countries, which we argue is likely to be positively associated with 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. Our results are also robust to whether or not East Asian countries, which show very weak momentum, are included in our sample. Finally, consistent with the predictions of behavioral models, momentum profits reverse one year after portfolio formation, especially in countries with high degrees of individualism.