Individualism%20and%20Momentum%20around%20the%20World

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Individualism and Momentum around the World

• Andy C.W. Chui Hong Kong Polytechnic
• Sheridan Titman UT Austin
• K.C. John Wei HKUST
• December 2004

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The Momentum Effect

• Momentum strategy
• Buy the past winners and sell the past losers.
• Profitability of momentum strategy
• Yes in the U.S.
• Jegadeesh and Titman (1993, 2001)
• Yes for most of the European countries
• Rouwenhorst (1998)
• Yes for a number of countries around the world.
• Griffin, Ji, and Martin (2003)
• No for most of the countries in Asia including
  Japan
• Chui, Titman, and Wei (2003)
• The evidence indicates that
• Momentum effect varies across countries

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Cross-country differences in Momentum Existing
Views

• Momentum effect is stronger in countries with
  better investor protection.
• Chui, Titman, and Wei (2003)
• Momentum strategy is more profitable in common
  law countries than in civil law countries.
• Hong, Lee, and Swaminathan (2003)
• Momentum strategy is more profitable in countries
  with less corruption problem.
• Problems with these findings
• Their sample sizes are small.
• Chui et. al. (2003) Eight Asian Countries
• Hong et. al. (2003) Eleven Countries.

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Cross-country differences in Momentum A New Look

• Momentum effect is positively related to the
  degree of individualism across countries.
• Using data from forty-one countries, we find that
  the average monthly returns on zero-cost momentum
  portfolios are more than 0.5 higher in countries
  with individualism indexes in the top 30 than
  those countries with indexes in the bottom 30.

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Conceptual Framework

• Higher Degree of
• Individualism/
• Lower Degree of Collectivism

More Emphasis on Independent-self/ More Emphasis
on Interdependent-self
More Overconfidence Self-attribution bias/ Less
Overconfidence and Self-attribution bias
Stronger Momentum Effect/ Weaker Momentum Effect
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Individualism vs. Collectivism

• Individualism pertains to the degree to which
  people in a country tend to have an independent
  rather than an interdependent self-construal, and
  the reverse is the case for collectivism
  (Hofstede (2001)).

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Independent self vs. Interdependent self

• Independent self-construal
• a conception of the self as an autonomous,
  independent person.
• (Markus and Kitayama (1991, p.226))
• To satisfy oneself, others DO NOT have an
  important role to play.
• Interdependent self-construal
• View themselves not as separate from the social
  context but as more connected and less
  differentiated from others.
• (Markus and Kitayama (1991, p.227))
• To satisfy oneself, others DO have an important
  role to play.

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Individualism and Overconfidence

• Overconfidence
• People tend to over-estimate their ability.
• Because of their independent self-construal,
  people in individualistic cultures are motivated
  to think themselves as stars, as winners as
  above average and as the repositories of special
  qualities. Heine et. al. (1999, pp.769-770)
• Evidences from psychology support this view
  (Markus and Kitayama (1991) and Heine et al.
  (1999)).

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Individualism and Overconfidence

• Overconfidence
• Gelfand et al. (2002) suggest that The self is
  served in individualistic cultures by being
  distinct from and better than others, in order to
  accomplish the culturally mandated task of being
  independent and standing out.
• By contrast, the self is served in
  collectivistic cultures by being accepted by
  others and by focusing on negative
  characteristics, in order to accomplish the
  culturally mandated task of being interdependent
  and blending in. (p.835)

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Self-attribution bias

• Self-attribution bias
• Also known as Self-serving bias.
• It refers to the tendency of people to enhance
  or protect their self-esteem by taking credit for
  success and denying responsibility for failure.
• (Zuckerman (1979, p.245))

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Individualism and Self-attribution bias

• Evidences from psychology
• After a review of a large body of experiments,
  Heine et al. (1999) conclude that independence
  bears a clear relation with self-esteem and
  interdependence, on the other hand, was only
  weakly related to self-esteem (p.778).
• After a review of the studies on cross-cultural
  variation in self-attribution bias, Jari-erik
  Nurmi (1992) suggests that this cross-cultural
  difference is typically explained by Western
  individualism and the collectivist orientation of
  Eastern cultures (p.70)

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Individualism and Self-attribution bias

• Evidences from psychology
• Evidence suggests that the pattern of
  self-serving biases found in societies more
  supportive of independent selves, such as the
  United States, is not always found in societies
  in which interdependent selves receive stronger
  encouragement, such as Japan (Moghaddam (1998,
  p.167)

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Overconfidence/Self-attribution bias and Momentum

• Daniel, Hirshleifer, and Subrahmanyam (1998)

Momentum
Overconfidence
Self-attribution bias
Investors overweight their private signals.
Overweight public signals that confirm their
private signals and underweight those that do not.
Therefore, public signals tend to reinforce
previous private signals and this leads to the
momentum effect.
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Individualism and Momentum Hypothesis

• Since investors in individualistic cultures tend
  to be more overconfident and more prone to
  self-attribution bias, the momentum effects
  should be stronger in individualist cultures.

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Data description

• Individualism Index
• On 66 countries. The higher the index value, the
  higher is the degree of individualism (Hofstede
  2001).
• Monthly data on stocks
• February 1980 to June 2003.
• Datastream International (55 countries except the
  U.S.).
• For the U.S., we use CRSP.
• Data collected are stock returns,
• market capitalization, and trading volume.

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Data description

• Institutional variables
• Legal system (La Porta et al. (LLSV, 1998)).
• Anti-director rights
• (LLSV 1998. The higher the index value, the
  better the legal protection).
• Accounting standards
• (LLSV 1998. The higher the index value, the
  better the accounting standards).
• Risk of Earnings management
• (Leuz et al. 2003. The higher the index value,
  the higher the risk of earnings management).
• Corruption perception index
• (Transparency International. The lower the index
  value, the higher the corruption level.)

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Sample description

• Common Stocks
• Both domestic and foreign, which are listed on
  the major stock exchange in each country.
• Cross-listed stocks are included in their
  home-country samples.
• Both active and dead stocks.
• Include only a stocks primary class, such the
  A-shares, the Bearer-shares.

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Sample description

• Common Stocks
• To improve the quality of data obtained from
  Datastream International, we do the followings
• For Datastream data, exclude stocks whose market
  capitalization is below the 5th percentile of all
  the stocks within each country in each month.
• For Datastream data, to hedge against possible
  data error, we only include stock returns within
  the 1 percentile and the 99 percentile of the
  return distribution in each month in each country.

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Sample description

• More Criteria
• Each stock should have a return history of at
  least eight months.
• Each country should have at least 30 stocks in
  any month during our sample period.
• Each country should have a return history of at
  least five years.
• Our final sample includes 41 countries and more
  than 20,000 individual stocks.

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Winners vs. Losers

• Classified by past six-month returns.
• Winner portfolio (top one-third of the stocks in
  each country).
• Loser portfolio (bottom one-third of the stocks
  in each country).
• These portfolios are equally weighted.
• Six-month holding period.
• A one-month gap between the ranking period and
  the holding period.
• Returns are in U.S. dollars.

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Momentum portfolios

• Overlapping momentum portfolios
• Jegadeesh and Titman (1993)
• Country-average portfolio
• A portfolio that put equal weight on each
  country-specific momentum portfolio, i.e. each
  country will have the same weight regardless the
  number of stocks in each country.
• Country-neutral portfolio
• Includes all winners and losers in each country
  and each stock in this portfolio will have the
  same weight.

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World Momentum Effect

• Country-average portfolio
• Country-neutral portfolio

Winner Loser W minus L
198103-200306 1.462 (5.60) 0.925 (3.23) 0.537 (6.48)
198402-200306 1.542 (5.39) 0.983 (3.13) 0.559 (6.06)
Winner Loser W minus L
198103-200306 1.397 (5.24) 0.819 (2.63) 0.578 (4.44)
198402-200306 1.369 (4.76) 0.779 (2.28) 0.591 (4.11)
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Individualism and Momentum
Winner Loser W minus L
Country-average 198402-200306 Low 1.559 (4.03) 1.250 (2.89) 0.308 (2.22)
Country-average 198402-200306 2 1.493 (4.61) 1.001 (2.90) 0.492 (4.75)
Country-average 198402-200306 High 1.574 (5.82) 0.735 (2.41) 0.838 (6.76)
Country-average 198402-200306 High-Low 0.015 (0.05) -0.515 (-1.42) 0.530 (3.42)
Country-neutral 198402-200306 Low 1.475 (3.57) 1.276 (2.69) 0.200 (1.20)
Country-neutral 198402-200306 2 1.209 (3.50) 0.908 (2.42) 0.301 (2.20)
Country-neutral 198402-200306 High 1.542 (4.96) 0.774 (2.00) 0.768 (3.74)
Country-neutral 198402-200306 High-Low 0.067 (0.19) -0.502 (-1.24) 0.569 (2.59)
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Fama-MacBeth Regressions

• The empirical model
• The empirical result, 198402-200306

?o Indv DL Anti Cpix Acct Emgt
0.556 (0.56) 0.012 (2.79) 0.26 (1.57) 0.011 (0.17) 0.016 (0.51) -0.014 (-1.48) 0.001 (0.04)
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Robustness Test An Alternative Individualism
Index

• GLOBEs Institutional Collectivism Index
• Obtained from the Global Leadership and
  Organizational Behavior Effectiveness Program.
• An updated measure of Hofstedes individualism
  index.
• Define IndvGLOBEGLOBEs index times -1.
• Fama-MacBeth regressions
• Replace Indv with IndvGLOBE.
• We obtain similar findings
• IndvGLOBE 0.431 (3.14)
• Cpix 0.081 (2.18)
• Emgt -0.028 (-2.37)

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Robustness TestBootstrap Analyses

• We randomly generate data by randomly assigning
  individualism scores and other country
  characteristics to the forty-one countries in our
  sample.
• 1,000 random assignments.
• For each random assignment, we repeat the
  Fama-MacBeth regressions
• The bootstrap t-statistic for each parameter is
  calculated from the empirical distributions of
  the estimates which are generated from the
  regressions.

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Robustness TestThe Bootstrap Analyses

• The Bootstrap t-statistics

Indv/ IndvGLOBE DL Anti Cpix Acct Emgt
Hofstede 3.00 1.64 0.21 0.41 -1.56 0.07
GLOBE 3.39 0.66 -0.32 2.83 -1.22 -2.55
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Conclusion

• The momentum effect is weaker in countries with
  less individualistic cultures.
• This finding can be viewed as support for the
  Daniel, Hirshleifer, and Subrahmanyam (1998)
  model.

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Implications (1)

• Culture can have an important effect on stock
  return patterns.
• Investors in different cultures interpret
  information in different ways and are subject to
  different biases.

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Implications (2)

• Investors in less individualistic cultures may
  place too much credence on consensus opinions,
  and may exhibit herd like overreaction to
  conventional wisdom.
• We find that the book-to-market effect is
  stronger in less individualistic countries.
• However, the DHS model implies that the BM effect
  is caused by overconfidence. Therefore, the DHS
  model will predict that the BM effect should be
  stronger in countries with more overconfidence.

Low-Indv Median-Indv High-Indv
BM effect 0.654 0.325 0.242
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Implications (3)

• Investors have a tendency to underreact to public
  information in the more individualistic cultures
  and to overreact to public information in the
  less individualistic cultures.

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Supplementary Diagram (1)
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Supplementary Diagram (2)