Resiliency, Short Sales, and Expected Returns in the Korean Stock Market

Resiliency denotes how quickly stock prices recover from non-information shocks and revert to fundamentals. This study examines the role of resiliency in explaining the expected returns in the Korean stock market by decomposing prices into permanent and transitory components and applying spectral analysis. We show that low resiliency generates a significant illiquidity premium, robust to firm size, alternative liquidity measures, and across normal, crisis, high-, and low-volatility periods. Additionally, the effect of resiliency becomes insignificant when short sales are restricted, suggesting the significance of short sales availability in determining resiliency premiums.