Hostname: page-component-cd9895bd7-gxg78 Total loading time: 0 Render date: 2024-12-21T19:33:38.107Z Has data issue: false hasContentIssue false
  • English
  • Français

Investor Myopia and the Momentum Premium across International Equity Markets

Published online by Cambridge University Press:  02 October 2018

Paul Docherty  and
Gareth Hurst
Get access Rights & Permissions [Opens in a new window]

Abstract

Myopic investors focus on short-run price changes rather than long-term fundamental value, resulting in an overweighting of public information and a slow diffusion of fundamental news. Such processing of information can produce price drifts similar to those seen in behavioral models of momentum. We explore the impact of myopia over an international sample, finding that momentum is stronger in more myopic countries, and this relationship is magnified where the proportion of funds under delegated management is high. We therefore argue that investor myopia, which arises due to agency issues in delegated funds management, is an important determinant of momentum.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 6 , December 2018 , pp. 2465 - 2490
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

The comments from Pedro Barroso (the referee), Peter Brooke, Stephen Brown, Jennifer Conrad (the editor), Steve Easton, Robert Faff, Phil Gray, Adrian Melia, and Tom Smith have been greatly appreciated. This paper has also benefited from the comments of seminar participants at the 2014 Australasian Finance and Banking Conference, the 2017 Vietnam International Conference in Finance, Monash University, and the University of Newcastle. Research funding provided by Platypus Asset Management is greatly appreciated. The views expressed in this article are the views of the authors; they do not necessarily represent the views of First State Super.

References

Allen, F., and Gorton, G.. “Churning Bubbles.” Review of Economic Studies, 60 (1993), 813–836.Google Scholar
Allen, F.; Morris, S.; and Shin, H.. “Beauty Contests and Iterated Expectations in Asset Markets.” Review of Financial Studies, 19 (2006), 719–752.Google Scholar
Bae, K.; Ozoguz, A.; Tan, T.; and Wirjanto, T.. “Do Foreigners Facilitate Information Transmission in Emerging Markets?” Journal of Financial Economics, 105 (2012), 209–227.Google Scholar
Barberis, N.; Shleifer, A.; and Vishny, R.. “A Model of Investor Sentiment.” Journal of Financial Economics, 43 (1998), 307–343.Google Scholar
Barroso, P., and Maio, P.. “Managing the Risk of the ‘Betting-Against-Beta’ Anomaly: Does It Pay to Bet against Beta?” Working Paper, University of New South Wales (2016).Google Scholar
Barroso, P., and Santa-Clara, P.. “Momentum Has Its Moments.” Journal of Financial Economics, 116 (2015), 110–120.Google Scholar
Beckmann, D.; Menkhoff, L.; and Suto, M.. “Does Culture Influence Asset Managers’ Views and Behavior?” Journal of Economic Behavior & Organization, 67 (2008), 624–643.Google Scholar
Benartzi, S., and Thaler, R.. “Myopic Loss Aversion and the Equity Premium Puzzle.” Quarterly Journal of Economics, 110 (1995), 75–92.Google Scholar
Bushee, B.“The Influence of Institutional Investors on Myopic R&D Investment Behavior.” Accounting Review, 73 (1998), 305–333.Google Scholar
Callen, J., and Fang, X.. “Institutional Investor Stability and Crash Risk: Monitoring versus Short-Termism?” Journal of Banking & Finance, 37 (2013), 3047–3063.Google Scholar
Campbell, J. Y., and Shiller, R. J.. “The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors.” Review of Financial Studies, 1 (1989), 195–228.Google Scholar
Cella, C.; Ellul, A.; and Giannetti, M.. “Investors’ Horizons and the Amplification of Market Shocks.” Review of Financial Studies, 26 (2013), 1607–1648.Google Scholar
Cespa, G., and Vives, X.. “The Beauty Contest and Short-Term Trading.” Journal of Finance, 70 (2015), 2099–2154.Google Scholar
Chan, K.; Covrig, V.; and Ng, L.. “What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide.” Journal of Finance, 60 (2005), 1495–1534.Google Scholar
Chan, K.; Hameed, A.; and Tong, W.. “Profitability of Momentum Strategies in the International Equity Markets.” Journal of Financial and Quantitative Analysis, 35 (2000), 153–172.Google Scholar
Chordia, T., and Shivakumar, L.. “Momentum, Business Cycle and Time-Varying Expected Returns.” Journal of Finance, 57 (2002), 985–1019.Google Scholar
Chui, A. C. W.; Titman, S.; and Wei, K. C. J.. “Individualism and Momentum around the World.” Journal of Finance, 65 (2010), 361–392.Google Scholar
Conrad, J., and Kaul, G.. “An Anatomy of Trading Strategies.” Review of Financial Studies, 11 (1998), 489–519.Google Scholar
Cooper, M.; Gutierrez, R.; and Hameed, A.. “Market States and Momentum.” Journal of Finance, 59 (2004), 1345–1365.Google Scholar
Coval, J., and Moskowitz, T.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 2045–2073.Google Scholar
Coval, J., and Stafford, E.. “Asset Fire Sales (and Purchases) in Equity Markets.” Journal of Financial Economics, 86 (2007), 479–512.Google Scholar
Cremers, M., and Pareek, A.. “Short-Term Trading and Stock Return Anomalies: Momentum, Reversal and Share Issuance.” Review of Finance, 19 (2015), 1649–1701.Google Scholar
Cuthbertson, K.; Hayes, S.; and Nitzsche, D.. “The Behavior of UK Stock Prices and Returns: Is the Market Efficient?” Economic Journal, 107 (1997), 986–1008.Google Scholar
Daniel, K.; Hirshleifer, D.; and Subrahmanyam, A.. “Investor Psychology and Security Market Under- and Overreaction.” Journal of Finance, 53 (1998), 1839–1886.Google Scholar
Daniel, K., and Moskowitz, T.. “Momentum Crashes.” Journal of Financial Economics, 122 (2016), 221–247.Google Scholar
Dhaliwal, D.; Radhakrishnan, S.; Tsang, A.; and Yang, Y.. “Nonfinancial Disclosure and Analyst Forecast Accuracy: International Evidence on Corporate Social Responsibility Disclosure.” Accounting Review, 87 (2012), 723–759.Google Scholar
Dou, P.; Truong, C.; and Veeraraghavan, M.. “Individualism, Uncertainty Avoidance, and Earnings Momentum in International Markets.” Contemporary Accounting Research, 33 (2016), 851–881.Google Scholar
Eriksen, K., and Kvaloy, O.. “Myopic Investment Management.” Review of Finance, 14 (2010), 521–542.Google Scholar
Eun, C. S.; Wang, L.; and Xiao, S. C.. “Culture and R 2 .” Journal of Financial Economics, 115 (2015), 283–303.Google Scholar
Frazzini, A.“The Disposition Effect and Underreaction to News.” Journal of Finance, 61 (2006), 2017–2046.Google Scholar
French, K., and Poterba, J.. “Investor Diversification and International Equity Markets.” American Economic Review, 81 (1991), 222–226.Google Scholar
Froot, K.; Scharfstein, D.; and Stein, J.. “Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation.” Journal of Finance, 47 (1992), 1461–1484.Google Scholar
Gervais, S., and Odean, T.. “Learning to be Overconfident.” Review of Financial Studies, 14 (2001), 1–27.Google Scholar
Grinblatt, M., and Han, B.. “Prospect Theory, Mental Accounting, and Momentum.” Journal of Financial Economics, 78 (2005), 311–339.Google Scholar
Gümbel, A.“Trading on Short-Term Information.” Journal of Institutional and Theoretical Economics, 161 (2005), 428–452.Google Scholar
Haigh, M., and List, J.. “Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis.” Journal of Finance, 60 (2005), 523–534.Google Scholar
Haldane, A., and Davies, R.. “The Short Long.” Bank of  England  (speech).  Available  at http://www.bankofengland.co.uk/publications/speeches (2011).Google Scholar
Hofstede, G. Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations across Nations, 2nd ed. Beverly Hills, CA: Sage (2001).Google Scholar
Hong, H., and Stein, J.. “A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets.” Journal of Finance, 54 (1999), 2143–2184.Google Scholar
Ince, O., and Porter, R.. “Individual Equity Return Data from Thomson Datastream: Handle with Care!” Journal of Financial Research, 29 (2006), 463–479.Google Scholar
Jegadeesh, N.“Evidence of Predictable Behavior of Security Returns.” Journal of Finance, 45 (1990), 881–898.Google Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48 (1993), 65–91.Google Scholar
Jegadeesh, N., and Titman, S.. “Profitability of Momentum Strategies: An Evaluation of Alternative Explanations.” Journal of Finance, 56 (2001), 699–720.Google Scholar
Johnson, C. T.“Rational Momentum Effects.” Journal of Finance, 57 (2002), 585–608.Google Scholar
Keynes, J. M. The General Theory of Employment, Interest and Money. London, UK: Macmillan (1936).Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “What Works in Securities Laws?” Journal of Finance, 61 (2006), 1–32.Google Scholar
Lee, C., and Swaminathan, B.. “Price Momentum and Trading Volume.” Journal of Finance, 55 (2000), 2017–2069.Google Scholar
Lehmann, B.“Fads, Martingales, and Market Efficiency.” Quarterly Journal of Economics, 105 (1990), 1–28.Google Scholar
Menkhoff, L.“Are Momentum Traders Different? Implications for the Momentum Puzzle.” Applied Economics, 43 (2011), 4415–4430.Google Scholar
Moreira, A., and Muir, T.. “Volatility-Managed Portfolios.” Journal of Finance, 72 (2017), 1611–1644.Google Scholar
Narayanan, M.“Managerial Incentives for Short-Term Results.” Journal of Finance, 40 (1985), 1469–1484.Google Scholar
Novy-Marx, R.“Fundamentally, Momentum Is Fundamental Momentum.” Working Paper, University of Rochester (2015).Google Scholar
Parthiban, D.; Hitt, M.; and Gimeno, J.. “The Influence of Activism by Institutional Investors on R&D.” Academy of Management Journal, 44 (2001), 144–157.Google Scholar
Scharfstein, D., and Stein, J.. “Herd Behavior and Investment.” American Economic Review, 80 (1990), 465–479.Google Scholar
Sotes-Paladino, J.; Wang, G.; and Yao, Y.. “The Value of Growth: Changes in Profitability and Future Stock Returns.” Working Paper, University of Melbourne (2017).Google Scholar
Stein, J. C.“Agency, Information and Corporate Investment.” In Handbook of the Economics of Finance, Vol. 1, Constantinides, G. M., Harris, M., and Stulz, R. M., eds. Amsterdam, Netherlands: Elsevier (2003), 111–165.Google Scholar
Stein, J. C.“Why Are Most Funds Open-Ended? Competition and the Limits of Arbitrage.” Quarterly Journal of Economics, 120 (2005), 247–272.Google Scholar
Stulz, R. M., and Williamson, R.. “Culture, Openness, and Finance.” Journal of Financial Economics, 70 (2003), 313–349.Google Scholar
Titman, S.; Wei, J.; and Xie, F.. “Market Development and the Asset Growth Effect: International Evidence.” Journal of Financial and Quantitative Analysis, 48 (2013), 1405–1432.Google Scholar
Tversky, A., and Kahneman, D.. “Advances in Prospect Theory: Cumulative Representation of Uncertainty.” Journal of Risk and Uncertainty, 5 (1992), 297–323.Google Scholar
Verardo, M.“Heterogeneous Beliefs and Momentum Profits.” Journal of Financial and Quantitative Analysis, 44 (2009), 795–822.Google Scholar
Wang, M.; Rieger, M.; and Hens, T.. “The Impact of Culture on Loss Aversion.” Behavioral Decision Making, 30 (2017), 270–281.Google Scholar
Zhang, F. X.“Information Uncertainty and Stock Returns.” Journal of Finance, 61 (2006), 105–137.Google Scholar
Supplementary material: File

Docherty and Hurst supplementary material

Docherty and Hurst supplementary material 1

Download Docherty and Hurst supplementary material(File)
File 207.3 KB