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Premiums for Non-Sustainable and Sustainable Components of Market Volatility: Evidence from the Korean Stock Market

Thuy Thi Thu Truong () and Jungmu Kim ()
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Thuy Thi Thu Truong: Department of Business Administration, School of Business, Yeungnam University, Gyeongsan 38541, Korea
Jungmu Kim: Department of Business Administration, School of Business, Yeungnam University, Gyeongsan 38541, Korea

Sustainability, 2019, vol. 11, issue 18, 1-15

Abstract: The study investigates the premiums expected for non-sustainable and sustainable components of market volatility in Korea during the August 1991 to December 2018 period. We decompose market volatility into non-sustainable and sustainable components and construct the factors that mimic the two respective components of market volatility. The portfolio analysis and Fama-MacBeth regressions reveal that both short- and long-term components are negative pricing factors in the Korean stock market. Specifically, stocks with higher sensitivities to the long-term volatility factor have lower average annual returns by approximately 14%, than stocks with lower sensitivities. This implies that stocks with high sensitivity to sustainable volatility provide a hedging opportunity against future uncertainty, and thus, investors are willing to pay an annual premium of 14% for such stocks. Our results are robust to variations in samples and methods.

Keywords: Korean market; market risk; pricing factor; stock returns; sustainable volatility (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2019
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