Asset Pricing Models in the Korean Stock Markets: A Review for the Period of 1980~2009

Abstract

This paper reviews 30 years of empirical research on asset pricing models in the Korean stock markets. The validity of the Capital Asset Pricing Model (CAPM) has been seriously challenged in Korea as in the other countries. The overall empirical results in Korea show, as they do in other countries, that the static CAPM fails to explain for stock returns in Korea. Contrary to the prediction of the CAPM, firm characteristic variables such as firm size, book-to-market, and earnings-to-price ratio have significant explanatory power for average stock returns in the Korean stock markets. Because of these CAPM-anomalous phenomena, various asset pricing models such as the types of Arbitrage Pricing Theory (APT), the Consumption-based Capital Asset Pricing Model (C-CAPM), and the types of the Intertemporal Capital Asset Pricing Model (I-CAPM) have been introduced and tested in the literature. The Fama and French(1993) three-factor model is arguably acceptable in explaining Korean stock returns. This paper also provides some explanations of various testing methodologies used in the literature for asset pricing models and discusses the related econometric issues.