Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
A Research on Size and Book-to-Market Ratio Effects based
on Good Deal Bound in Korea Equity Market (KOSPI)
HankyungLee1, Sehyeon Park2 and Bong Joon Kim3
Previous researches of Size and book-to-market(BM) ratio effects
have usually been evaluated by parametric Capital Asset Pricing
Model(CAPM)s. These parametric CAPMs are inevitably subject to
‘bad model’ problem, as is mentioned in Fama (1998). So, we
suggest nonparametric CAPMs without bad model problem.
Specifically, nonparametric stochastic discount factors (SDFs) are
directly estimated from market price of reference assets. This paper
evaluates Size and BM ratio effects in incomplete market through
nonparametric CAPMs.
Specific methods are as follows: First, we obtain admissible
SDFs set under incomplete market using Euler equation of Lucas
(1978). These nonparametric method does not suffer from the ‘bad
model’ problem. Second, we introduce good deal constraint of
Cochrane and Saa-Requejo (2000) into Euler equation. This makes
the set of admissible SDFs tighter. Third, using admissible SDFs, we
estimate the range of risk-adjusted expected return about Size, BM
ratio, and Fama and French 16 (FF16, 1993) mimicking portfolios. We
call it as good deal bounds.
We select 91-day certificate of deposit and 16 KOSPI sub-indices
for industry Group except for finance industry as reference assets.
We obtain weekly data from January 2001 to December 2007. The
number of observations is 364. Mimicking portfolios have the same
sample period.
Our results are as follows. The first is that smaller Size and higher BM
ratio mimicking portfolios are related with higher returns. These are the
same results as previous research. The second is that because the range
of good deal bounds reflects different risk preferences of representatives
under incomplete markets, the wide range of good deal bounds implies
that performance of mimicking portfolios can be different according to
heterogeneous risk preference of representatives under incomplete
market. Specifically, we found that small size and high BM ratio mimicking
portfolios had the range wider than any other mimicking portfolio.
Key words: Size Effects, BM Ratio Effects, Stochastic Discount Factor, Euler
Equation, No Arbitrage Constraints, Good Deal Constraints
JEL Codes: C14, G11
1
Ph.D student, Graduate School of Business Administration, Gyeongsang National University, Korea
nlfu2@hanmail.net
2
Ph.D student, Graduate School of Business Administration, Gyeongsang National University, Korea
robbin82@hanmail.net
3
Professor, the Departement of Business Administration, Gyeongsang National University, Korea 055- 772-1527.
bongjunkim1@gnu.ac.kr