Illiquidity, duration and momentum profits: evidence from the Korean stock market

• Published in: Seonmul yeongu (Online) Vol. 29; no. 1; pp. 49 - 72
• Main Authors: Bae, Jaewan, Lee, Changjun
• Format: Journal Article
• Language: English
• Published: Bingley Emerald Group Publishing Limited 01.03.2021; Emerald Publishing; 한국파생상품학회
• Subjects: Derivatives; duration; duration factor; Economic crisis; g11; g12; g14; illiquidity factor; market liquidity; momentum effect; Rates of return; Securities markets; Stock exchanges; Variables; 경영학; United States > US
• ISSN: 1229-988X; 2713-6647; 2713-6647; 1229-988X
• DOI: 10.1108/JDQS-11-2020-0028

This paper examines the role of illiquidity and duration factor in understanding the momentum profit in the Korean stock market. We find that the foreigner/institutional illiquidity factor explains the momentum effect. In addition, this paper finds that duration factor defined as the difference in returns of short-duration and long-duration stocks captures well the momentum profits. That is, a two-factor model with the market and duration factor performs much better than competing asset pricing models in explaining the momentum effect. Finally, when controlling for the duration factor, the explanatory power of the foreign/institutional illiquidity factor on the momentum profits disappears. In sum, our empirical finding indicates that the duration factor is the most important ingredient in understanding the momentum effect in the Korean stock market.