Market efficiency anomalies in Korea: Mispricing vs. omitted risk factors

Using a sample of Korean firms, this paper examines whether abnormal returns to various trading strategies based on publicly available information are consistent with mispricing (market inefficiency) or with the fundamental variables proxying for omitted risk factors. Results of various tests indicate that significant abnormal trading profits observed from DeBondt and Thaler's (1985) contrarian strategy and Ou and Penman's (1989) and Holthausen and Larcker's (1992) Pr-strategies are likely to be a result of market mispricing, while those from trading strategies based on firm size, earnings-to-price ratios, and book-to-price ratios are likely to be a result of omitted risk factors. © 1999 Kluwer Academic Publishers.