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Premiums for Non-Sustainable and Sustainable Components of Market Volatility: Evidence from the Korean Stock Market

Department of Business Administration, School of Business, Yeungnam University, Gyeongsan 38541, Korea
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Sustainability 2019, 11(18), 5123; https://doi.org/10.3390/su11185123
Received: 8 August 2019 / Revised: 6 September 2019 / Accepted: 11 September 2019 / Published: 19 September 2019
(This article belongs to the Section Economic and Business Aspects of Sustainability)
The study investigates the premiums expected for non-sustainable and sustainable components of market volatility in Korea during the August 1991 to December 2018 period. We decompose market volatility into non-sustainable and sustainable components and construct the factors that mimic the two respective components of market volatility. The portfolio analysis and Fama-MacBeth regressions reveal that both short- and long-term components are negative pricing factors in the Korean stock market. Specifically, stocks with higher sensitivities to the long-term volatility factor have lower average annual returns by approximately 14%, than stocks with lower sensitivities. This implies that stocks with high sensitivity to sustainable volatility provide a hedging opportunity against future uncertainty, and thus, investors are willing to pay an annual premium of 14% for such stocks. Our results are robust to variations in samples and methods. View Full-Text
Keywords: Korean market; market risk; pricing factor; stock returns; sustainable volatility Korean market; market risk; pricing factor; stock returns; sustainable volatility
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Truong, T.T.T.; Kim, J. Premiums for Non-Sustainable and Sustainable Components of Market Volatility: Evidence from the Korean Stock Market. Sustainability 2019, 11, 5123.

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