A cultural explanation of internationally correlated jumps

Abstract

Purpose – This study investigates the influence of national cultural differences on the comovement of stock return jumps between countries. It further examines whether this relationship is contingent upon the overall market direction and specific country subgroups. Design/methodology/approach – The authors utilize Hofstede’s national cultural dimensions to compute cultural distance, following the methodology of Kogut and Singh (1988). Following Barndorff-Nielsen and Shephard (2002), return jumps are estimated using five-minute data from 18 equity markets. A multinomial logistic regression is then employed to examine the relationship between internationally correlated return jumps and cultural distance. Findings – The findings reveal a negative association between cultural distance and positively correlated international return jumps, which implies that culturally similar countries are more prone to experiencing synchronized jumps. Conversely, the relationship with negatively correlated return jumps is found to be insignificant, with the exception of European and G7 countries. Thus, the association is notably stronger when return jumps in both markets are in the same direction, especially during periods of negative returns. Originality/value – Using five-minute data to detect return jumps, this is the first article that investigates a relationship between correlated return jumps and cultural distance, showing the importance of national culture on global equity markets and portfolio diversification.