11

Individualism and Momentum Individualism and Momentum around the Worldaround the World

Andy C.W. Chui: Hong Kong PolytechnicAndy C.W. Chui: Hong Kong Polytechnic

Sheridan Titman: UT AustinSheridan Titman: UT Austin

K.C. John Wei: HKUSTK.C. John Wei: HKUST

December 2004December 2004

22

The Momentum EffectThe Momentum Effect Momentum strategy:Momentum strategy:

• Buy the past winners and sell the past losers. Buy the past winners and sell the past losers. Profitability of momentum strategy:Profitability of momentum strategy:

• YesYes in the U.S. in the U.S. Jegadeesh and Titman (1993, 2001)Jegadeesh and Titman (1993, 2001)

• YesYes for most of the European countries for most of the European countriesRouwenhorst (1998)Rouwenhorst (1998)

• YesYes for a number of countries around the world. for a number of countries around the world.Griffin, Ji, and Martin (2003)Griffin, Ji, and Martin (2003)

• NoNo for most of the countries in Asia including Japan for most of the countries in Asia including JapanChui, Titman, and Wei (2003)Chui, Titman, and Wei (2003)The evidence indicates thatThe evidence indicates that

Momentum effect varies across countriesMomentum effect varies across countries

33

Cross-country differences in Cross-country differences in Momentum: Existing ViewsMomentum: Existing Views

Momentum effect is stronger in countries Momentum effect is stronger in countries with better investor protection.with better investor protection.• Chui, Titman, and Wei (2003)Chui, Titman, and Wei (2003)

Momentum strategy is more profitable in common Momentum strategy is more profitable in common law countries than in civil law countries. law countries than in civil law countries.

• Hong, Lee, and Swaminathan (2003)Hong, Lee, and Swaminathan (2003) Momentum strategy is more profitable in countries Momentum strategy is more profitable in countries

with less corruption problem.with less corruption problem. Problems with these findings:Problems with these findings:

• Their sample sizes are small.Their sample sizes are small. Chui et. al. (2003): Eight Asian CountriesChui et. al. (2003): Eight Asian Countries Hong et. al. (2003): Eleven Countries.Hong et. al. (2003): Eleven Countries.

44

Cross-country differences in Cross-country differences in Momentum: A New LookMomentum: A New Look

Momentum effect is positively Momentum effect is positively related to the degree of individualism related to the degree of individualism across countries.across countries.• Using data from forty-one countries, we Using data from forty-one countries, we

find that the average monthly returns on find that the average monthly returns on zero-cost momentum portfolios are zero-cost momentum portfolios are more than more than 0.5%0.5% higher in countries with higher in countries with individualism indexes in the top 30% individualism indexes in the top 30% than those countries with indexes in the than those countries with indexes in the bottom 30%.bottom 30%.

55

Conceptual FrameworkConceptual FrameworkHigher 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

66

Individualism vs. CollectivismIndividualism vs. Collectivism

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

77

Independent self Independent self vs. Interdependent selfvs. Interdependent self

Independent self-construalIndependent self-construal• ““a conception of the self as an autonomous, a conception of the self as an autonomous,

independent person.”independent person.” (Markus and Kitayama (1991, p.226))(Markus and Kitayama (1991, p.226))

To satisfy oneself, To satisfy oneself, othersothers DODO NOTNOT have an have an important role to play.important role to play.

Interdependent self-construalInterdependent self-construal• View themselves View themselves “not as separate from the social “not as separate from the social

context but as more connected and less context but as more connected and less differentiated from others.”differentiated from others.”

(Markus and Kitayama (1991, p.227))(Markus and Kitayama (1991, p.227))To satisfy oneself, To satisfy oneself, othersothers DODO have an important have an important role to play.role to play.

88

Individualism and OverconfidenceIndividualism and Overconfidence

Overconfidence:Overconfidence:• People tend to over-estimate their ability.People tend to over-estimate their ability.• Because of their independent self-construal, Because of their independent self-construal,

people in individualistic cultures are motivated to people in individualistic cultures are motivated to think themselves think themselves “as stars, as winners as above “as stars, as winners as above average and as the repositories of special average and as the repositories of special qualities.”qualities.” Heine et. al. (1999, pp.769-770) Heine et. al. (1999, pp.769-770)

Evidences from psychology support this view Evidences from psychology support this view (Markus and Kitayama (1991) and Heine et al. (Markus and Kitayama (1991) and Heine et al. (1999)). (1999)).

99

Individualism and OverconfidenceIndividualism and Overconfidence

Overconfidence:Overconfidence:• Gelfand et al. (2002) suggest that “The self is Gelfand et al. (2002) suggest that “The self is

served in served in individualistic cultures by being distinct individualistic cultures by being distinct from and better than othersfrom and better than others, in order to , in order to accomplish the culturally mandated task of being accomplish the culturally mandated task of being independent and standing out. independent and standing out.

By contrast, the self is served in By contrast, the self is served in collectivistic collectivistic cultures by being accepted by others and by cultures by being accepted by others and by focusing on negative characteristicsfocusing on negative characteristics, in order to , in order to accomplish the culturally mandated task of being accomplish the culturally mandated task of being interdependent and blending in.” (p.835)interdependent and blending in.” (p.835)

1010

Self-attribution biasSelf-attribution bias

Self-attribution bias Self-attribution bias • Also known as Self-serving bias.Also known as Self-serving bias.• It refers to the tendency of people to It refers to the tendency of people to

“enhance or protect their self-esteem by “enhance or protect their self-esteem by taking credit for success and denying taking credit for success and denying responsibility for failure.”responsibility for failure.”

(Zuckerman (1979, p.245))(Zuckerman (1979, p.245))

1111

Individualism and Self-attribution biasIndividualism and Self-attribution bias Evidences from psychologyEvidences from psychology

• After a review of a large body of experiments, After a review of a large body of experiments, Heine et al. (1999) conclude that Heine et al. (1999) conclude that “independence “independence bears a clear relation with self-esteem”bears a clear relation with self-esteem” and and “interdependence, on the other hand, was only “interdependence, on the other hand, was only weakly related to self-esteem”weakly related to self-esteem” (p.778). (p.778).

• After a review of the studies on cross-cultural After a review of the studies on cross-cultural variation in self-attribution bias, Jari-erik Nurmi variation in self-attribution bias, Jari-erik Nurmi (1992) suggests that (1992) suggests that “this cross-cultural “this cross-cultural difference is typically explained by Western difference is typically explained by Western individualism and the collectivist orientation of individualism and the collectivist orientation of Eastern cultures”Eastern cultures” (p.70) (p.70)

1212

Individualism and Self-attribution biasIndividualism and Self-attribution bias Evidences from psychologyEvidences from psychology

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

1313

Overconfidence/Self-attribution bias Overconfidence/Self-attribution bias and Momentumand Momentum

Daniel, Hirshleifer, and Subrahmanyam Daniel, Hirshleifer, and Subrahmanyam (1998)(1998)

Overconfidence Self-attribution bias

Momentum

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.

1414

Individualism and Momentum: Individualism and Momentum: HypothesisHypothesis

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

1515

Data descriptionData description

Individualism IndexIndividualism Index• On 66 countries. The higher the index value, On 66 countries. The higher the index value,

the higher is the degree of individualism the higher is the degree of individualism (Hofstede 2001).(Hofstede 2001).

Monthly data on stocksMonthly data on stocks• February 1980 to June 2003.February 1980 to June 2003.• Datastream International (55 countries except Datastream International (55 countries except

the U.S.).the U.S.).• For the U.S., we use CRSP.For the U.S., we use CRSP.• Data collected are stock returns, Data collected are stock returns,

market capitalization, and trading volume.market capitalization, and trading volume.

1616

Data descriptionData description Institutional variables:Institutional variables:

• Legal systemLegal system (La Porta et al. (LLSV, 1998)). (La Porta et al. (LLSV, 1998)).• Anti-director rightsAnti-director rights

(LLSV 1998. The higher the index value, the better (LLSV 1998. The higher the index value, the better the legal protection).the legal protection).

• Accounting standardsAccounting standards(LLSV 1998. The higher the index value, the better (LLSV 1998. The higher the index value, the better the accounting standards).the accounting standards).

• Risk of Earnings managementRisk of Earnings management(Leuz et al. 2003. The higher the index value, the (Leuz et al. 2003. The higher the index value, the higher the risk of earnings management).higher the risk of earnings management).

• Corruption perception indexCorruption perception index(Transparency International. The lower the index (Transparency International. The lower the index value, the higher the corruption level.)value, the higher the corruption level.)

1717

Sample descriptionSample description Common StocksCommon Stocks

• Both domestic and foreign, which are listed on Both domestic and foreign, which are listed on the major stock exchange in each country.the major stock exchange in each country.

• Cross-listed stocks are included in their home-Cross-listed stocks are included in their home-country samples. country samples.

• Both active and dead stocks.Both active and dead stocks.• Include only a stock’s primary class, such the Include only a stock’s primary class, such the

A-shares, the Bearer-shares.A-shares, the Bearer-shares.

1818

Sample descriptionSample description Common StocksCommon Stocks

To improve the quality of data obtained from To improve the quality of data obtained from Datastream International, we do the followings:Datastream International, we do the followings:• For Datastream data, exclude stocks whose For Datastream data, exclude stocks whose

market capitalization is below the 5market capitalization is below the 5thth percentile percentile of all the stocks within each country in each of all the stocks within each country in each month.month.

• For Datastream data, to hedge against possible For Datastream data, to hedge against possible data error, we only include stock returns within data error, we only include stock returns within the 1 percentile and the 99 percentile of the the 1 percentile and the 99 percentile of the return distribution in each month in each return distribution in each month in each country.country.

1919

Sample descriptionSample description

More CriteriaMore Criteria• Each stock should have a return history of at least Each stock should have a return history of at least

eight months.eight months.• Each country should have at least 30 stocks in Each country should have at least 30 stocks in

any month during our sample period.any month during our sample period.• Each country should have a return history of at Each country should have a return history of at

least five years.least five years.

Our final sample includes 41 countries and Our final sample includes 41 countries and more than 20,000 individual stocks.more than 20,000 individual stocks.

2020

Market Capitalization (Big 10 in June 2003)

0

2000000

4000000

6000000

8000000

10000000

12000000

US

$ M

illi

on

Start

End

2121

Market Capitalization (Other Countries)

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

Ba

ng

lad

esh

Pa

kis

tan

Ph

ilip

pin

es

New

Zea

lan

d

Po

lan

d

Mex

ico

Ind

on

esi

a

Po

rtu

ga

l

Tu

rk

ey

Au

stria

Sw

itzerla

nd

Ch

ile

Th

ail

an

d

Irela

nd

Isra

el

Den

ma

rk

No

rw

ay

Arg

en

tin

a

Greece

Bra

zil

So

uth

Afr

ica

Sin

ga

po

re

Ma

lay

sia

Fin

lan

d

Belg

ium

Ind

ia

Sw

ed

en

Ko

rea

Ta

iwa

n

Sp

ain

Neth

erla

nd

s

US

$ M

illi

on

Start

End

2222

Winners vs. LosersWinners vs. Losers

• Classified by past six-month returns.Classified by past six-month returns.• Winner portfolio (top one-third of the Winner portfolio (top one-third of the

stocks in each country).stocks in each country).• Loser portfolio (bottom one-third of the Loser portfolio (bottom one-third of the

stocks in each country).stocks in each country).• These portfolios are equally weighted.These portfolios are equally weighted.• Six-month holding period.Six-month holding period.• A one-month gap between the ranking A one-month gap between the ranking

period and the holding period.period and the holding period.• Returns are in U.S. dollars.Returns are in U.S. dollars.

2323

Momentum portfoliosMomentum portfolios

Overlapping momentum portfoliosOverlapping momentum portfolios• Jegadeesh and Titman (1993)Jegadeesh and Titman (1993)

Country-average portfolioCountry-average portfolio• A portfolio that put equal weight on each A portfolio that put equal weight on each

country-specific momentum portfolio, i.e. each country-specific momentum portfolio, i.e. each country will have the same weight regardless country will have the same weight regardless the number of stocks in each country.the number of stocks in each country.

Country-neutral portfolioCountry-neutral portfolio• Includes all winners and losers in each country Includes all winners and losers in each country

and each stock in this portfolio will have the and each stock in this portfolio will have the same weight.same weight.

2424

World Momentum EffectWorld Momentum Effect Country-average portfolioCountry-average portfolio

Country-neutral portfolioCountry-neutral portfolio

WinnerWinner LoserLoser W minus LW minus L198103-198103-200306200306

1.4621.462

(5.60)(5.60)0.9250.925

(3.23)(3.23)0.5370.537

(6.48)(6.48)

198402-198402-200306200306

1.5421.542

(5.39)(5.39)0.9830.983

(3.13)(3.13)0.5590.559

(6.06)(6.06)

WinnerWinner LoserLoser W minus LW minus L198103-198103-200306200306

1.397 1.397

(5.24)(5.24)0.8190.819

(2.63)(2.63)0.5780.578

(4.44)(4.44)

198402-198402-200306200306

1.3691.369

(4.76)(4.76)0.7790.779

(2.28)(2.28)0.5910.591

(4.11)(4.11)

2525

Momentum Effect (bottom 20 countries ranked by individualism index)

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

Average m

on

thly

profi

ts (

%)

2626

Momentum Effect (top 21 countries ranked by individualism index)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Average m

on

thly

profi

ts (

%)

2727

Individualism and MomentumIndividualism and Momentum

WinnerWinner LoserLoser W minus LW minus L

Country-Country-averageaverage

198402-198402-200306200306

LowLow 1.559 (4.03)1.559 (4.03) 1.250 (2.89)1.250 (2.89) 0.308 (2.22)0.308 (2.22)

22 1.493 (4.61)1.493 (4.61) 1.001 (2.90)1.001 (2.90) 0.492 (4.75)0.492 (4.75)

HighHigh 1.574 (5.82)1.574 (5.82) 0.735 (2.41)0.735 (2.41) 0.838 (6.76)0.838 (6.76)

High-LowHigh-Low 0.015 (0.05)0.015 (0.05) -0.515 (-1.42)-0.515 (-1.42) 0.530 (3.42)0.530 (3.42)

Country-Country-neutralneutral

198402-198402-200306200306

LowLow 1.475 (3.57)1.475 (3.57) 1.276 (2.69)1.276 (2.69) 0.200 (1.20)0.200 (1.20)

22 1.209 (3.50)1.209 (3.50) 0.908 (2.42)0.908 (2.42) 0.301 (2.20)0.301 (2.20)

HighHigh 1.542 (4.96)1.542 (4.96) 0.774 (2.00)0.774 (2.00) 0.768 (3.74)0.768 (3.74)

High-LowHigh-Low 0.067 (0.19)0.067 (0.19) -0.502 (-1.24)-0.502 (-1.24) 0.569 (2.59)0.569 (2.59)

2828

Fama-MacBeth RegressionsFama-MacBeth Regressions

The empirical modelThe empirical model

The empirical result, 198402-200306The empirical result, 198402-200306

itiii

iiioit

EmgtAcctCpix

AntiDLIndvMom

654

321

oo IndvIndv DLDL AntiAnti CpixCpix AcctAcct EmgtEmgt

0.5560.556

(0.56)(0.56)0.0120.012

(2.79)(2.79)0.260.26

(1.57)(1.57)0.0110.011

(0.17)(0.17)0.0160.016

(0.51)(0.51)-0.014-0.014

(-1.48)(-1.48)0.0010.001

(0.04)(0.04)

2929

Robustness Test: Robustness Test: An Alternative Individualism Index An Alternative Individualism Index

GLOBE’s Institutional Collectivism IndexGLOBE’s Institutional Collectivism Index• Obtained from the Global Leadership and Organizational Obtained from the Global Leadership and Organizational

Behavior Effectiveness Program.Behavior Effectiveness Program.• An updated measure of Hofstede’s individualism index.An updated measure of Hofstede’s individualism index.

• Define IndvDefine IndvGLOBEGLOBE=GLOBE’s index times -1.=GLOBE’s index times -1.

Fama-MacBeth regressionsFama-MacBeth regressions• Replace Indv with Replace Indv with IndvIndvGLOBEGLOBE..

• We obtain similar findings:We obtain similar findings: IndvIndvGLOBEGLOBE 0.431 (3.14) 0.431 (3.14) CpixCpix 0.081 (2.18) 0.081 (2.18) EmgtEmgt -0.028 (-2.37)-0.028 (-2.37)

3030

Robustness Test:Robustness Test:Bootstrap AnalysesBootstrap Analyses

We randomly generate data by randomly We randomly generate data by randomly assigning individualism scores and other country assigning individualism scores and other country characteristics to the forty-one countries in our characteristics to the forty-one countries in our sample.sample.

1,000 random assignments.1,000 random assignments. For each random assignment, we repeat the For each random assignment, we repeat the

Fama-MacBeth regressionsFama-MacBeth regressions

The bootstrap t-statistic for each parameter is The bootstrap t-statistic for each parameter is calculated from the empirical distributions of the calculated from the empirical distributions of the estimates which are generated from the estimates which are generated from the regressions.regressions.

3131

Robustness Test:Robustness Test:The Bootstrap AnalysesThe Bootstrap Analyses

The Bootstrap t-statisticsThe Bootstrap t-statistics

Indv/Indv/

IndvIndvGLOBEGLOBE DLDL AntiAnti CpixCpix AcctAcct EmgtEmgt

HofstedeHofstede 3.003.00 1.641.64 0.210.21 0.410.41 -1.56-1.56 0.070.07

GLOBEGLOBE 3.393.39 0.660.66 -0.32-0.32 2.832.83 -1.22-1.22 -2.55-2.55

3232

ConclusionConclusion

The momentum effect is weaker in The momentum effect is weaker in countries with less individualistic countries with less individualistic cultures.cultures.

This finding can be viewed as This finding can be viewed as support for the Daniel, Hirshleifer, support for the Daniel, Hirshleifer, and Subrahmanyam (1998) model.and Subrahmanyam (1998) model.

3333

Implications (1)Implications (1)

Culture can have an important effect Culture can have an important effect on stock return patterns.on stock return patterns.

Investors in different cultures Investors in different cultures interpret information in different interpret information in different ways and are subject to different ways and are subject to different biases.biases.

3434

Implications (2)Implications (2) Investors in less individualistic cultures may place too Investors in less individualistic cultures may place too

much credence on consensus opinions, and may much credence on consensus opinions, and may exhibit herd like overreaction to conventional wisdom. exhibit herd like overreaction to conventional wisdom. • We find that the book-to-market effect is stronger in less We find that the book-to-market effect is stronger in less

individualistic countries.individualistic countries.

However, the DHS model implies that the BM effect is However, the DHS model implies that the BM effect is caused by overconfidence. Therefore, the DHS model caused by overconfidence. Therefore, the DHS model will predict that the BM effect should be stronger in will predict that the BM effect should be stronger in countries with more overconfidence.countries with more overconfidence.

Low-IndvLow-Indv Median-IndvMedian-Indv High-IndvHigh-Indv

BM effectBM effect 0.654%0.654% 0.325%0.325% 0.242%0.242%

3535

Implications (3)Implications (3)

Investors have a tendency to Investors have a tendency to underreactunderreact to public information in to public information in the more the more individualistic culturesindividualistic cultures and and to to overreactoverreact to public information in to public information in the less the less individualistic culturesindividualistic cultures. .

3636

Supplementary Diagram (1) Supplementary Diagram (1) Cumulative profits on the country-average momentum portfolios

in the post-holding period

-6

-4

-2

0

2

4

6

8

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Month relative to portfolio formation

Cu

mu

lati

ve p

rofi

ts (

%)

Indv-low

Indv-median

Indv-high

3737

Supplementary Diagram (2)Supplementary Diagram (2)Cumulative profits on the country-neutral momentum portfolios in the post-

holding period

-8

-6

-4

-2

0

2

4

6

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Month relative to portfolio formation

Cu

mu

lati

ve p

ro

fits

(%

)

Indv-low

Indv-median

Indv-high