Cross-Sectional Expected Returns And Predictability In The Korean Stock Market

We combine the anomaly variables having significant predictive power for returns to estimate expected returns and investigate the cross-sectional predictability of the return estimates in the Korean stock market. The predictive slope from regressions of estimates on realized returns is 0.79 and strongly significant. The long-short portfolio strategy based on expected returns yields significantly positive excess returns, even relative to Fama and French five-factor model or Hou, Xue, and Zhang q-factor model. The high-minus-low spreads for the portfolios of the expected returns have a significant alpha after controlling for the three Fama-French factors, as well as each anomaly factor.