Are momentum crashes individualistic?

Abstract

According to Chui, Titman, and Wei (2010) momentum returns are higher in more individualistic countries. On the other hand, it is known that the momentum strategy reports significant losses when it experiences crashes, and these crashes happen when stock markets rebound in bear markets. With a sample of 24 countries with different levels of individualism, I created dynamic portfolios based on volatility scaling to predict momentum crashes, to study if momentum crashes and the level of individualism are related. I find the level of individualism of countries and momentum crashes are not correlated, since momentum crashes occur in a similar way in the universe of the countries that I used. The implementation of the dynamic portfolio strategy maintains the evidence that countries with higher level of individualism have better returns than those countries with lower level of individualism. The momentum strategy experiences more significant crashes during post-bear market periods. As a result, it behaves like a short call option on the market with an optionality coefficient.

Date of Award	25 Jan 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Pedro Barroso (Supervisor)