The Role of a Mispricing Factor in Korean Stock Market

Abstract

This paper finds that a three-factor model with a mispricing factor along with size and market factors, proposed by Yuan and Stambaugh (2017), has a superior ability in accommodating anomalies in KOSPI market over prominent four- and five-factor alternative models, yet not in TOTAL and KOSDAQ market. The mispricing factor combines information across 3 notable anomalies in TOTAL and KOSPI market, and 6 anomalies in KOSDAQ market by averaging rankings of anomalies. In addition, the result show that the investor sentiment has no effect on anomalies in Korea despite the fact that Korean stock market bears more short-sale risk and constraints than the U.S. stock market.