This paper provides empirical evaluation of recently proposed determinants of the cross-sectional stock returns in Korea, taking into account recent critique of empirical asset pricing literature such as the low power of test diagnostics and the bias induced by noise in prices. We do not find convincing empirical evidence supporting the Fama-French three-factor model as a benchmark asset pricing model for risk adjustment. In addition, empirical evidence indicates that the bias induced by noisy prices is substantial enough in mean returns of equal-weighted portfolios to change the economic and statistical significance of the estimated risk premium for factor portfolios, suggesting that researchers exercise caution in designing factor portfolios and interpreting results.
Bibliographical noteFunding Information:
We thank an anonymous referee and seminar participants at Korea University, Seoul National University, and Yonsei University for helpful comments and discussions. Hahn gratefully acknowledges faculty research support from Yonsei University.
© 2015 Elsevier B.V.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics