Macro Liquidity Risk, Money Growth, and the Cross-Section of Stock Returns: The Case of Korea

Hosung Jung and Dongcheol Kim

Emerging Markets Finance and Trade, 2016, vol. 52, issue 6, 1438-1454

Abstract: According to the homogeneity of money holding purpose, we decompose the broad money M2 into an underlying and a non-underlying part and propose innovations in future non-underlying M2 growth as a proxy for macro liquidity. In both the cross-sectional regression tests and the GMM tests, we find that risk related to innovations in future non-underlying M2 growth is strongly significantly priced in Korea, after controlling for the well-known risk factors and other macroeconomic variables. Meanwhile, risk related to innovations in future aggregate or underlying M2 growth is insignificantly priced. These results indicate that non-underlying M2 growth more directly affects macro liquidity than does aggregate or underlying M2 growth.

Date: 2016
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DOI: 10.1080/1540496X.2015.1046767

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