Advanced Search
MyIDEAS: Login to save this article or follow this journal

Evaluating asset pricing models in the Korean stock market

Contents:

Author Info

  • Kim, Soon-Ho
  • Kim, Dongcheol
  • Shin, Hyun-Soo

Abstract

This paper evaluates and compares asset pricing models in the Korean stock market. The asset pricing models considered are the CAPM, APT-motivated models, the Consumption-based CAPM, Intertemporal CAPM-motivated models, and the Jagannathan and Wang conditional CAPM model. By using various test portfolios as well as individual stocks, we conduct time-series tests and cross-sectional regression tests based on individual t-tests, the joint F-tests, the Hansen and Jagannathan (1997) distance, and R-squares. Overall, the Fama and French (1993) five-factor model performs most satisfactorily among the asset pricing models considered in explaining the intertemporal and cross-sectional behavior of stock returns in Korea. The Fama and French (1993) three-factor model, the Chen et al. (2010) three-factor model, and the Campbell (1996) model are the next. The results indicate that the two bond portfolios, term spread and default spread, play an important role in explaining stock returns in Korea.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0927538X1100059X
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

Volume (Year): 20 (2012)
Issue (Month): 2 ()
Pages: 198-227

as in new window
Handle: RePEc:eee:pacfin:v:20:y:2012:i:2:p:198-227

Contact details of provider:
Web page: http://www.elsevier.com/locate/pacfin

Related research

Keywords: Pricing performance; Asset pricing models; CAPM; APT; Consumption-based CAPM; Intertemporal CAPM; Korean stock markets;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
  2. Kim, Dongcheol & Kim, Tong Suk & Min, Byoung-Kyu, 2011. "Future labor income growth and the cross-section of equity returns," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 67-81, January.
  3. Yao, Tong & Yu, Tong & Zhang, Ting & Chen, Shaw, 2011. "Asset growth and stock returns: Evidence from Asian financial markets," Pacific-Basin Finance Journal, Elsevier, vol. 19(1), pages 115-139, January.
  4. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
  5. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
  6. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  7. Raymond Kan & Cesare Robotti & Jay Shanken, 2013. "Pricing Model Performance and the Two-Pass Cross-Sectional Regression Methodology," Journal of Finance, American Finance Association, vol. 68(6), pages 2617-2649, December.
  8. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
  9. Hansen, Lars Peter & Jagannathan, Ravi, 1997. " Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-90, June.
  10. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
  11. Raymond Kan & Cesare Robotti, 2007. "Model comparison using the Hansen-Jagannathan distance," Working Paper 2007-04, Federal Reserve Bank of Atlanta.
  12. Kenneth D. West & Whitney K. Newey, 1995. "Automatic Lag Selection in Covariance Matrix Estimation," NBER Technical Working Papers 0144, National Bureau of Economic Research, Inc.
  13. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
  14. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  15. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  16. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
  17. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  18. Dongcheol Kim, 2006. "On the Information Uncertainty Risk and the January Effect," The Journal of Business, University of Chicago Press, vol. 79(4), pages 2127-2162, July.
  19. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.
  20. Chui, Andy C. W. & Wei, K. C. John, 1998. "Book-to-market, firm size, and the turn-of-the-year effect: Evidence from Pacific-Basin emerging markets," Pacific-Basin Finance Journal, Elsevier, vol. 6(3-4), pages 275-293, August.
  21. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  22. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
  23. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
  24. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  25. Michael J. Cooper & Huseyin Gulen & Michael J. Schill, 2008. "Asset Growth and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1609-1651, 08.
  26. Shmuel Kandel & Robert F. Stambaugh, 1994. "Portfolio Inefficiency and the Cross-Section of Expected Returns," NBER Working Papers 4702, National Bureau of Economic Research, Inc.
  27. John Y. Campbell & John H. Cochrane, 2000. "Explaining the Poor Performance of Consumption-based Asset Pricing Models," Journal of Finance, American Finance Association, vol. 55(6), pages 2863-2878, December.
  28. Cochrane, John H, 1996. "A Cross-Sectional Test of an Investment-Based Asset Pricing Model," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 572-621, June.
  29. Kim, Dongcheol, 1997. "A Reexamination of Firm Size, Book-to-Market, and Earnings Price in the Cross-Section of Expected Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(04), pages 463-489, December.
  30. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
  31. Reinganum, Marc R., 1981. "Misspecification of capital asset pricing : Empirical anomalies based on earnings' yields and market values," Journal of Financial Economics, Elsevier, vol. 9(1), pages 19-46, March.
  32. Hahn, Jaehoon & Lee, Hangyong, 2006. "Yield Spreads as Alternative Risk Factors for Size and Book-to-Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(02), pages 245-269, June.
  33. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
  34. Ramiah, Vikash & Cheng, Ka Yeung & Orriols, Julien & Naughton, Tony & Hallahan, Terrence, 2011. "Contrarian investment strategies work better for dually-traded stocks: Evidence from Hong Kong," Pacific-Basin Finance Journal, Elsevier, vol. 19(1), pages 140-156, January.
  35. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
  36. Chen, Tsung-Cheng & Chien, Chin-Chen, 2011. "Size effect in January and cultural influences in an emerging stock market: The perspective of behavioral finance," Pacific-Basin Finance Journal, Elsevier, vol. 19(2), pages 208-229, April.
  37. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-52, September.
  38. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-55, July.
  39. Narayan, Paresh Kumar & Zheng, Xinwei, 2010. "Market liquidity risk factor and financial market anomalies: Evidence from the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 18(5), pages 509-520, November.
  40. Chang, Yuk Ying & Faff, Robert & Hwang, Chuan-Yang, 2010. "Liquidity and stock returns in Japan: New evidence," Pacific-Basin Finance Journal, Elsevier, vol. 18(1), pages 90-115, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Jaehyung Choi & Sungsoo Choi & Wonseok Kang, 2012. "Momentum universe shrinkage effect in price momentum," Papers 1211.6517, arXiv.org.
  2. Jaehyung Choi, 2014. "Maximum drawdown, recovery, and momentum," Papers 1403.8125, arXiv.org, revised May 2014.
  3. Jaehyung Choi, 2012. "Physical approach to price momentum and its application to momentum strategy," Papers 1208.2775, arXiv.org, revised Jul 2014.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:20:y:2012:i:2:p:198-227. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.