Capturing the Level, Slope and Curve Factor of Stock Returns in Korea

Abstract

Using Clarke (2016)s procedure, I construct and test a Level, Slope, and Curve (LSC) Factor Model of stock returns in Korea. Built using a nearly identical specification to the US version, the model reflects characteristics of the cross section of expected returns in Korean stocks, by the means of reversed pattern in the curve factor. It is also robust to a number of time series and cross-sectional sensitivity checks. Moreover, a set of asset pricing tests run on 80 test asset portfolios suggests that the model prices the cross-section of expected returns to a considerable degree, and performs better than other such well known models as the CAPM, Liquidity Factor Model, and the Conditional CAPM. While the model does not yet dominate the more popular Fama and French (1993) and Carhart (1997)s momentum factor models under its original form, it also leaves room for future progress since the model can be readily expanded to accommodate new anomalies.