The risk-return relations: evidence from the Korean and Taiwan stock markets

Abstract

This article examines the risk-return relations conditional on up and down market periods in the Korean and Taiwan stock markets. Based on statistical tests adjusted for the effects of heteroskedasticity and autocorrelation of the residuals, beta is found positively (negatively) related to realized returns in up (down) markets. However, the results are sensitive to portfolio aggregation methods. Its role as a risk measure vanishes in down markets for the two-way (beta-size and size-beta) sorted portfolios. Unsystematic risk is significantly and positively priced only in up markets and mainly for beta-sorted portfolios while total risk is correctly priced except in Taiwan during down markets. Moreover, the impact of skewness and kurtosis on realized returns is not only sensitive to portfolio aggregation methods but also different across stock markets. They are found to be more relevant risk characteristics in the Korean than in the Taiwan stock market.

Notes

¹ Data for some companies are not available for some years. The selection criterion is that the listed stocks in each stock market must have no more than 10% of missing values and zero returns out of the total returns of each individual stock.

² Results obtained from using value-weighted and equally weighted market proxies are quite similar and only different in some cases. In general, models employing equally weighted market returns produce higher adjusted coefficient of determination. Furthermore, as the main conclusions are the same for these two different market proxies, we only report the results from the equally weighted market proxy.