Capital Market Anomalies in Korea

Abstract

Empirical studies have identified a variety of capital market regularities that are commonly known as anomalies including the size effect, book-to-market effect, the January effect, the weekend effect, long-term reversal effect, net stock issues effect, the first-day underpricing and the long-term underperformance of Initial Price Offerings (IPOs) and the post-merger underperformance. For each anomaly, we discuss the existence and consequences of these well-known effects in the Korean stock market. The empirical evidence on the anomalies in Korea can be summarized as follows. The anomalous returns are significant in most of the cross-sectional regressions. The anomalous returns associated with net stock issues are positive in the short period around the issue date, a finding opposite to the evidence found in the U.S. markets. Momentum phenomenon in average returns exist on the industry level, but they are absent for individual stocks. Also, momentum anomalies are only found at the individual level when stock markets are less volatile. That is, Momentum anomalies are less robust in Korea than in the U.S. and European countries. Additionally, dividend yields and market interest rates have no ability to predict stock market returns in Korea contrary to U.S. findings, while earning price ratios have some predictability. The turn-of-the-year effect, the weekend effect and the long-term reversal effect are persistent in Korea.