US economic uncertainty and the Korean stock market reaction

Yun, Jaesun and Kang, Jangkoo and Kwon, Kyung Yoon (2019) US economic uncertainty and the Korean stock market reaction. Emerging Markets Finance and Trade. ISSN 1540-496X

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    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.