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ASSET PRICING AND RETURN REVERSAL IN KOREAN AND JAPANESE STOCK MARKET
Title
ASSET PRICING AND RETURN REVERSAL IN KOREAN AND JAPANESE STOCK MARKET
Creator
Kim, Pil Joon
Date
2020
Description
The stock market in Asia achieved a rapid development in the 1980’s, mainly in Japan and Korea. In particular, stock market in Japan and Korea...
Show moreThe stock market in Asia achieved a rapid development in the 1980’s, mainly in Japan and Korea. In particular, stock market in Japan and Korea is deeply related to the US stock market. However, in 1997, a major financial crisis hit Asia, and IMF decided to provide financial support to Korea. In addition, in 2011, a nuclear accident at the Fukushima Daiichi Nuclear Power Plant was the most severe nuclear accident since the 26 April 1986 Chernobyl disaster. Nevertheless, the Japanese and Korean markets experienced stable growths. Were Japanese and Korean stock markets truly stable and efficient? This study empirically studied market efficiency through stock market return reversal in the Japanese and Korean stock market and the characteristics of these two stock markets were compared and analyzed.Significant return reversal phenomenon was observed as a result of validating return reversal phenomenon against the stock markets in Korea and Japan. Furthermore, return reversal level differed based on the abnormal (excess) return calculation method used in the test model. Return reversal phenomenon can be found more clearly in loser portfolio than in winner portfolio in general. In particular, when the abnormal (excess) return was calculated using CAPM model, different result from existing research was observed. I also found that the Fama-French 3 factor model can compensate for the CAPM problem. I concluded that this phenomenon is observed in Korea and Japan stock market supporting DeBondt & Talher that CAPM misleads theoretical stock price return reversal and Brown and Warner (1980), who found that sophisticated CAPM do not perform better than simple model like market adjusted returns model. This is interpreted that the stock markets in Korea and Japan are not efficient and continue to have unstable factors. These findings provide full of suggestions to further research. CAPM is to explain market equilibrium price as a one-factor model, the Fama-French 3 factor model is a multi-factor model, and it can be said to more accurately describe the equilibrium price by adding size and gross value factor in describing the market equilibrium price. These results show that if Fama-French 3 factor model uses, it can solve the problem when using CAPM.The January effect is found significantly in both the Korean and Japanese markets. In the Korean stock market, the short-term seasonal reversal effect is more pronounced than in the long-term, and in the Japanese stock market, the long-term seasonal reversal effect is more pronounced than in the short-term.
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