US economic uncertainty and the Korean stock market reaction

Jaesun Yun, Jangkoo Kang, Kyung Yoon Kwon

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

This paper examines whether US economic uncertainty is significantly priced in the Korean stock markets. Our results show that stocks highly sensitive to US economic uncertainty with positively or negatively large uncertainty betas have lower future returns. Motivated by Miller’s (1977) and Hong and Sraer’s (2016) overpricing explanation, we suggest that these stocks are more likely to be exposed to greater divergence of opinions and thus overpriced. More importantly, we further suggest that the large proportion of retail investors which is a distinctive feature of the Korean stock markets contributes to overpricing by limiting arbitrage. Utilizing our unique intraday data, we measure limits to arbitrage with levels of retail trading, and find further supporting evidence that overpricing is significant only within stocks with high limits to arbitrage and in during high retail-sentiment period.
Original languageEnglish
Number of pages31
JournalEmerging Markets Finance and Trade
Early online date10 Oct 2019
DOIs
Publication statusE-pub ahead of print - 10 Oct 2019

Keywords

  • uncertainty
  • economic uncertainty
  • emerging stock market
  • Korean stock market
  • limits to arbitrage
  • sentiment

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