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Premiums for Non-Sustainable and Sustainable Components of Market Volatility: Evidence from the Korean Stock Market

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  • Thuy Thi Thu Truong

    (Department of Business Administration, School of Business, Yeungnam University, Gyeongsan 38541, Korea)

  • Jungmu Kim

    (Department of Business Administration, School of Business, Yeungnam University, Gyeongsan 38541, Korea)

Abstract

The study investigates the premiums expected for non-sustainable and sustainable components of market volatility in Korea during the August 1991 to December 2018 period. We decompose market volatility into non-sustainable and sustainable components and construct the factors that mimic the two respective components of market volatility. The portfolio analysis and Fama-MacBeth regressions reveal that both short- and long-term components are negative pricing factors in the Korean stock market. Specifically, stocks with higher sensitivities to the long-term volatility factor have lower average annual returns by approximately 14%, than stocks with lower sensitivities. This implies that stocks with high sensitivity to sustainable volatility provide a hedging opportunity against future uncertainty, and thus, investors are willing to pay an annual premium of 14% for such stocks. Our results are robust to variations in samples and methods.

Suggested Citation

  • Thuy Thi Thu Truong & Jungmu Kim, 2019. "Premiums for Non-Sustainable and Sustainable Components of Market Volatility: Evidence from the Korean Stock Market," Sustainability, MDPI, vol. 11(18), pages 1-15, September.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:18:p:5123-:d:268548
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