Short-term Market Beta Premium in the Korean Stock Market

This study empirically investigated the significant positive premium from the short-term market beta in the previous month in the Korean stock market. This positive premium was not observed in the market betas for any other one-month estimation period or for any of the various month combinations within the past 12 months. This implies that the previous month provided differential information for the short-term market beta. Moreover, the short-term market beta premium was identified even after controlling for anomalies (size, short-term reversals, idiosyncratic volatility, maximum, and liquidity) that may generate negative premiums in the future from the previous month. This means that unique information from the previous month influenced the short-term market beta. These results suggest that the short-term market beta has a differential predictive ability that can explain cross-sectional return variations in terms of risk and return. In addition, when applying the same test process to the U.S. stock markets, no significant positive premium was identified from the market beta of the previous month. In exploring behavioral explanations, the positive premium of the short-term market beta was closely related to net buying trades in the high trading activity of individual investors and net selling trades in the high trading activity of foreign investors.