Abstract
We comprehensively investigate what drives stock returns in South Korea stock market which has been one of the most important emerging markets. Unlike the USA market and other developed markets, the well-known cash-flow yield, dividend yield, earnings yield and return reversal factors are not significant pricing factors for stocks in South Korea while momentum factor has a significant and negative pricing premium. We also find that GDP growth is a systematic pricing factor across stocks after controlling for market, value, and size factors. The pricing premium of GDP growth is significantly positive and consistent with Merton’s (1973) ICAPM because economic growth provides positive investment opportunities to investors. For cross-sectional stock return predictability, our Fama-MacBath (1973) regressions show that a stock’s book-to-market ratio, cash-low yield, dividend yield and return reversal are significant predictors at 1% level after controlling for market, value, size, momentum and GDP factors.
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