Investor Myopia and the Momentum Premium across International Equity Markets

The existence of momentum returns has long been established by prior studies, but there has not been a definitive reason for why momentum returns occur.  The authors suggest the reason is that investors are myopic (i.e., nearsighted), and that speculators may overweight public information and underweight private information, which would result in prices taking longer to reach their true fundamental value and for more short-term information to drive prices.  In addition, institutional investor myopia may result from short-term incentives, producing price drifts similar to those found in behavioral models.

The authors took many countries and ranked them according to their level of cultural myopia.  Then they compared that myopia index to the level of momentum returns in each of the countries.  In doing so, they find that countries that tend to be myopic usually have higher momentum returns.

Next, the authors ranked and split the countries into 3 equal groups, then simulated forming equal-weight portfolios of countries for the "Myopic" third, the "Neutral" third, and the "Long-Termist" third.  They find that the myopic portfolio has much higher momentum returns than the long-termist portfolio over the 1988-2015 period.  So we might argue that countries that are culturally more myopic might have higher momentum returns, so the level of myopia of investors might explain momentum returns.

Finally, the authors form regressions of momentum returns and control for other factors that have been found to be related to momentum returns in other research.  The authors find that despite controlling for many other factors, the myopia factor is still significantly related to momentum returns.

Docherty, P., & Hurst, G. (2018). Investor Myopia and the Momentum Premium across International Equity Markets. Journal of Financial & Quantitative Analysis, 53(6), 2465–2490.