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Macro Liquidity Risk, Money Growth, and the Cross-Section of Stock Returns: The Case of Korea
- Authors
- Jung, Hosung; Kim, Dongcheol
- Issue Date
- 2016
- Publisher
- ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD
- Keywords
- broad money M2; cross-sectional regression test; economic tracking portfolio; GMM tests; innovations in future money growth; risk factor; underlying and non-underlying M2
- Citation
- EMERGING MARKETS FINANCE AND TRADE, v.52, no.6, pp.1438 - 1454
- Indexed
- SSCI
SCOPUS
- Journal Title
- EMERGING MARKETS FINANCE AND TRADE
- Volume
- 52
- Number
- 6
- Start Page
- 1438
- End Page
- 1454
- ISSN
- 1540-496X
- Abstract
- According to the homogeneity of money holding purpose, we decompose the broad money M2 into an underlying and a non-underlying part and propose innovations in future non-underlying M2 growth as a proxy for macro liquidity. In both the cross-sectional regression tests and the GMM tests, we find that risk related to innovations in future non-underlying M2 growth is strongly significantly priced in Korea, after controlling for the well-known risk factors and other macroeconomic variables. Meanwhile, risk related to innovations in future aggregate or underlying M2 growth is insignificantly priced. These results indicate that non-underlying M2 growth more directly affects macro liquidity than does aggregate or underlying M2 growth.
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