ABSTRACT
This paper investigates the impact of individualism on risk–return relationship across countries. In theory, return is expected to have a positive relation with risk. However, we find an insignificant relation between the stock market’s return and the market’s conditional variance. Our empirical evidence also suggests that higher individualism weakens the relationship between return and variance. These findings are consistent with the investors in highly individualistic countries who are overoptimism or overconfident with risk mis-estimations.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 Shefrin and Statman (Citation1994), Frydman et al. (Citation2014).
2 Analogously, Yu and Yuan (Citation2011) show that when the investor sentiment in the stock markets is high, the sentimental investors are optimistic about the market’s prospects and mis-estimate the variance of the stock market returns. Thus, they find that during high-sentiment periods, the risk–return relationship is undermined. While the investor sentiment in the stock markets is time-varying quickly, the culture in the country varies very slowly. Thus, the cultural difference is the complement to the investor sentiment in explaining cross-country differences in the financial markets.
3 Cheon and Lee (Citation2018), Dang et al. (Citation2019).
4 For Taiwan, some control variables such as the financial development index, the stocks traded turnover ratio of domestic shares, the number of listed domestic companies, and the market capitalization of listed domestic companies in the stock market divided by GDP are unavailable. Thus, Taiwan is excluded from our sample.
6 The regression results of RI are consistent with those of PI. We do not report these results, and these results are available from the authors upon request.