Individualism and Momentum Around the World

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