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Cross-Sectional Expected Returns and Predictability in the Korean Stock Market

ABSTRACT 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.