Theoretical and Empirical Asset Pricing: Evidence of Korean Economy.

Abstract

This paper investigates a cross-sectional risk-reward relationship (Sharpe-Lintner-Mossin paradigm), Fama and French (1992) size effect and conditional CAPM (Pettengill, 1995). It adopted Fama and Macbeth (1973) methodology and used data of listed Korean stock (KOSPI). Without considering conditional CAPM, I saw no evidence to support Sharpe Lintner-Mossin paradigm. Equally the role of size was statistically proven to be insignificant. Even though they exist a few discrepancies between this findings and those of Fletcher (1997) the result of conditional CAPM are same (Pettengill et al., 1995). That is, beta is significantly positive in up market and significant negative in down market. The effects in both up and down markets was found to be asymmetrical. The empirical findings backed by other previous studies found CAPM breathing and not dead as suggested by others findings.