A Study on the Long-term Reversal in the Korean Stock Market
This paper presents the existence and the sources of long-term reversal in the Korean stock market. During the past 15 years, reversals from the past performances of the individual stocks, which are listed in the Korean Stock Exchange, significantly existed in terms of buy-and-hold abnormal returns. We found that there exist significantly lasting cross-sectional contrarian premiums over 1- to 36-month holding periods during the period of Aril, 1987 to April, 2002. The sources of these premiums, however, were different among the past portfolio formation periods. In the 12 months formation period, the contrarian premiums were found to result mainly from the systematic risk factors of Fama-French 3 factor model, but the premiums in the 24 and 36 months formation periods were not due to the systematic risk factors, but to the hypothesis of behavioral finance that the overreaction increases with the length of formation period. Additionally, we analyzed the sources of contrarian premiums in the divided sample periods, up market and down market periods. In the down market period, co-skewness factor premiums were found to play an important role for explaining the contrarian premiums, but in the up market period, contrarian premiums were found to be an evidence of market inefficiency which could not be explained from any asset pricing model.