Comprehensive Asset Pricing Tests in the Korean Stock Market

Abstract

We examine the empirical performance in the Korean stock market of three new asset pricing factor models: the Stambaugh-Yuan (2017) mispricing factor model, the Daniel et al. (2020) three-factor model, Barillas-Shanken (2018) six-factor model and the Hou et al. (2021) q5-factor model. We find that all factors in these factor models have significantly positive risk premiums and are not explained by the Fama-French six-factor model. Compared to other prevalent models, the q5 model shows the highest maximum Sharpe ratio, mainly due to its profitability and expected growth factors. Further, the q5 model exhibits superior performance in explaining the returns of 97 anomaly portfolios in the Korean market.