Journal of Korean Society of Industrial and Systems Engineering (산업경영시스템학회지)

Society of Korea Industrial and System Engineering (한국산업경영시스템학회)
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Business Cycle Consumption Risk and the Cross-Section of Stock Returns in Korea

경기순환주기 소비위험과 한국 주식 수익률 횡단면

  • Kang, Hankil (Department of Business Administration, Dankook University)
  • Received : 2021.11.10
  • Accepted : 2021.11.29
  • Published : 2021.12.31
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Abstract

Using the frequency-based decomposition, I decompose the consumption growth to explain well-known patterns of stock returns in the Korean market. To be more specific, the consumption growth is decomposed by its half-life of shocks. The component over four years of half-life is called the business-cycle consumption component, and the components with half-lives under four years are short-run components. I compute the long-run and short-run components of stock excess returns as well and use component-by-component sensitivities to price stock portfolios. As a result, the business-cycle consumption risk with half-life of over four years is useful in explaining the cross-section of size-book-to-market portfolios and size-momentum portfolios in the Korean stock market. The short-run components have their own pricing abilities with mixed direction, so that the restricted one short-term factor model is rejected. The explanatory power with short- and long-run components is comparable to that of the Fama-French three-factor model. The components with one- to four-year half-lives are also helpful in explaining the returns. The results about the long-run components emphasize the importance of long-run component in consumption growth to explain the asset returns.

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