Evaluating Asset Pricing Models in the Korean Stock Market

43 Pages Posted: 18 Jan 2014

See all articles by Soon-Ho Kim

Soon-Ho Kim

Korea University Business School (KUBS)

Dongcheol Kim

Korea University Business School

Hyun-Soo Shin

Korea University Business School (KUBS)

Date Written: April 1, 2012

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, Novy-Marx, and Zhang (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.

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

JEL Classification: G12, G14

Suggested Citation

Kim, Soon-Ho and Kim, Dongcheol and Shin, Hyun-Soo, Evaluating Asset Pricing Models in the Korean Stock Market (April 1, 2012). Pacific-Basin Finance Journal, Vol. 20, No. 2, 2012, Available at SSRN: https://ssrn.com/abstract=2380640

Soon-Ho Kim

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

Dongcheol Kim (Contact Author)

Korea University Business School ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea
+82-2-3290-2606 (Phone)

Hyun-Soo Shin

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

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