Determinants of the cross-sectional stock returns in Korea: evaluating recent empirical evidence

•We provide empirical evaluation of recently proposed determinants of the cross-sectional stock returns in Korea•We take into account the low dimensional factor structure in test portfolio returns and the bias induced by noise in prices.•Empirical evidence supporting the Fama-French three-factor model is not convincing.•We find a significant and robust cross-sectional relationship between share turnover and stock returns.•The bias induced by noisy prices is substantial in mean returns of equal-weighted factor portfolios.

This paper provides empirical evaluation of recently proposed determinants of the cross-sectional stock returns in Korea, taking into account recent critique of empirical asset pricing literature such as the low power of test diagnostics and the bias induced by noise in prices. We do not find convincing empirical evidence supporting the Fama-French three-factor model as a benchmark asset pricing model for risk adjustment. In addition, empirical evidence indicates that the bias induced by noisy prices is substantial enough in mean returns of equal-weighted portfolios to change the economic and statistical significance of the estimated risk premium for factor portfolios, suggesting that researchers exercise caution in designing factor portfolios and interpreting results.