Time-series predictability in the disaster model

This paper studies whether the Rietz–Barro “disaster” model, extended for a time-varying probability of disaster, can match the empirical evidence on predictability of stock returns. It is shown that when utility is CRRA, the model cannot replicate this evidence, regardless of parameter values. This motivates extending the disaster model to allow for Epstein–Zin utility. Analytical results show that when the probability of disaster is i.i.d., the model with Epstein–Zin utility can match the evidence on predictability qualitatively if the intertemporal elasticity of substitution is greater than unity. The case of a persistent probability of disaster is studied numerically, with partial success.     

The Epstein–Zin Model with Liquidity Extension

In this paper, we extend the Epstein–Zin model with liquidity risk and assess the extended model's performance against the traditional consumption pricing models. We show that liquidity is a significant risk factor, and it adds considerable explanatory power to the model. The liquidity‐extended model produces both a higher cross‐sectional R² and a smaller Hansen and Jagannathan distance than the traditional consumption‐based capital‐asset pricing model and the original Epstein–Zin model. Overall, we show that liquidity is both a priced factor and a key contributor to the extended Epstein–Zin model's goodness‐of‐fit.     

The impact of introductory accounting courses on student perceptions about the purpose of accounting information and the objectives of business: A comparison of the UK and Japan

This paper is concerned with the impact of introductory financial accounting courses on student perceptions of business objectives. The paper reports the results of a questionnaire survey of UK and Japanese university students which investigated their views at the start and end of an introductory financial accounting module. The views of Japanese students, in comparison with those from the UK, are of particular interest given evidence in the literature that traditional “social market” traditions in Japan are being influenced by Anglo-American “stock market” values. Our results are consistent with such a phenomenon in that Japanese students’ values regarding business objectives show significant changes that are not mirrored by changes in the perceptions of their UK counterparts. We suggest that accounting education is acting as a conduit for views more commonly held in Anglo-American societies.     

New Evidence on Risk Factors, Characteristics and the Cross-Sectional Variation of Japanese Stock Returns

This paper examines whether the cross-sectional variations in stock returns are better described by systematic risk factors or by firm characteristics such as book-to-market ratios and market capitalization. It provides new evidence from the Japanese stock market based on the recent sample period from 2002 to 2007, which is not addressed in the existing literature. Also, the new results are derived from the generalized method of moments applied to daily returns. The evidence suggests that both the firm size and book-to-market ratio are significantly related to average return premiums. There is mixed evidence, which tends to lend stronger support to the characteristic model rather than the Fama-French three-factor model as more reflective of the return dynamics in the Japanese stock market.     

Asset pricing and the role of macroeconomic volatility

Standard Real Business Cycle (RBC) models are well known to generate counter-factual asset pricing implications. This study provides a simple extension to the prior literature by studying an economy that follows a regime-switching process in conjunction with Epstein–Zin preferences for consumers. We provide a detailed theoretical and numerical analysis of the model’s predictions. We also show that a reasonable parameterization of our model conveys financial figures in line with US postwar data. Furthermore, we provide evidence in support of modeling a regime-dependent macroeconomic risk.     

An extensive analysis on the Japanese markets via S. Taylor's model

Applying S. Taylor's approach (1986), we make an extensive analysis on the Japanese stock market, foreign exchange market and the Japanese Government Bond Futures market. The purpose of this paper is to empirically reveal the structure of the Japanese markets via Taylor's model rather than to propose a new model. For this reason, we include a variety of analyzed data particularly for the Japanese stock market and the foreign exchange market because the results can be used in a different manner. The paper consists of three parts. But each part can be read separately. Part 1: Overshooting hypothesis for Japanese stock prices Part 2: A trend movement in daily/weekly Yen-Dollar exchange rates Part 3: Price variations of Japanese Government Futures. In the first part, the stock prices are shown to over-respond to new information, which is different from the behaviors of stock prices in other markets. In Part 2, a trend movement is revealed in Yen-Dollar exchange rates. In Part 3, a strategy in the Japanese Government Bond futures markets is shown to perform better than a buy and hold strategy.     

Measuring and Testing the Impact of News on Volatility

This paper defines the news impact curve which measures how new information is incorporated into volatility estimates. Various new and existing ARCH models including a partially nonparametric one are compared and estimated with daily Japanese stock return data. New diagnostic tests are presented which emphasize the asymmetry of the volatility response to news. Our results suggest that the model by Glosten, Jagannathan, and Runkle is the best parametric model. The EGARCH also can capture most of the asymmetry; however, there is evidence that the variability of the conditional variance implied by the EGARCH is too high.     

A note on the location choice of multinational banks: The case of Japanese financial institutions

There are many studies investigating the location choice of foreign direct investment (FDI) of US banks. Nigh et al. (Journal of International Business Studies 17 (1986) 59–72) find that the choice does not depend on local banking opportunity. This paper examines what factors affect the location choice of Japanese multinational financial institutions. Our results are consistent with previous studies analyzing US banks in that the FDI of the manufacturing industry is an important determinant of the location choice of Japanese financial institutions. However, our results differ from Nigh et al., in that Japanese financial institutions choose their locations at least partially based on the local banking opportunity in the host countries.     

The term structure of interest rates in a DSGE model with recursive preferences

A dynamic stochastic general equilibrium (DSGE) model in which households have Epstein and Zin recursive preferences is solved with perturbation. The parameters governing preferences and technology are estimated by maximum likelihood using macroeconomic data and the term structure of interest rates. The estimates imply a large risk aversion, an elasticity of intertemporal substitution higher than one, and substantial adjustment costs. Furthermore, the paper identifies the tensions within the model by estimating it on subsets of these data. The analysis concludes by pointing out potential extensions that may improve the model's fit.     

Endogenous Life‐Cycle Housing Investment and Portfolio Allocation

This paper develops a life‐cycle portfolio allocation model to address the effects of housing investment on the portfolio allocation of households. The model employs a comprehensive housing investment structure, Epstein–Zin recursive preferences, and a stock market entry cost. Furthermore, rather than resorting to calibration we estimate the value of the relative risk aversion and elasticity of intertemporal substitution. The model shows that housing investment has a strong crowding out effect on investment in risky assets throughout the life‐cycle. We further find that the effect of the presence of housing investment on households portfolio allocation is larger than the effect of having EZ recursive preferences.     

Fundamentals and bubbles in asset prices: Evidence from U.S. and Japanese asset prices

This paper investigates the existence and extent of non-fundamental bubbles in both U.S. and Japanese asset prices by employing a flexible empirical method which allows us to decompose asset prices into fundamental and non-fundamental bubble components. This study finds that a substantial fraction of U.S. and Japanese asset prices is accounted for by non-fundamental bubble components and that these asset prices overreact to non-fundamental bubble shocks. In addition, allowing for time-varying interest rates as another fundamental factor does not change any qualitative results about the role of non-fundamental bubble components. This suggests that the present value model fails to explain volatile asset price behavior even with time-varying interest rates. This paper was initially written when I was visiting Keio University in Japan. I benefited from several discussions with Mike Dothan, Pat Hess, and Steve LeRoy in my department, Takashi Kaneko, Yukitami Tsuji and Naoyuki Yoshino at Keio University, and Yong-Seok Park at the International University of Japan. Special thanks are due to the anonymous referee and the editor of this journal, who provided many useful and insightful comments that helped to improve the paper. This research was in part supported by a grant from the International Program Development.     

Consumption-portfolio optimization with recursive utility in incomplete markets

In an incomplete market, we study the optimal consumption-portfolio decision of an investor with recursive preferences of Epstein?CZin type. Applying a classical dynamic programming approach, we formulate the associated Hamilton?CJacobi?CBellman equation and provide a suitable verification theorem. The proof of this verification theorem is complicated by the fact that the Epstein?CZin aggregator is non-Lipschitz, so standard verification results (e.g. in Duffie and Epstein, Econometrica 60, 393?C394, 1992) are not applicable. We provide new explicit solutions to the Bellman equation with Epstein?CZin preferences in an incomplete market for non-unit elasticity of intertemporal substitution (EIS) and apply our verification result to prove that they solve the consumption-investment problem. We also compare our exact solutions to the Campbell?CShiller approximation and assess its accuracy.     

w-MPS risk aversion and the shadow CAPM: theory and empirical evidence

This paper presents the shadow capital asset pricing model (CAPM) of Ma [2011a. Advanced Asset Pricing Theory. London: Imperial College Press] as an intertemporal equilibrium asset pricing model, and tests it empirically. In contrast to the classical CAPM – a single-factor model based on a strong behavioral or distributional assumption – the shadow CAPM can be represented as a two-factor model, and only requires a modest behavioral assumption of weak form mean-preserving spread risk aversion. The empirical tests provide support in favor of the shadow CAPM over the classical CAPM, the consumption CAPM, or the Epstein and Zin [1991. “Substitution, Risk Aversion and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis”. Journal of Political Economy 99, 263–286] model. Moreover, the shadow CAPM provides a consistent explanation for the cross-sectional variations of expected returns on the stocks and for the time-varying equity premium.     

Residential Mobility Decisions in Japan: Effects of Housing Equity Constraints and Income Shocks under the Recourse Loan System

This paper draws on six waves of Japanese household longitudinal data (Keio Household Panel Survey, KHPS) and estimates a conditional fixed effects logit model to investigate the effects of housing equity constraints and income shocks on own-to-own residential moves in Japan. By looking at contemporaneous extended Loan-to-Value (ELTV) and extended Debt-to-Income (EDTI) ratios under the recourse loan system, we examine whether housing equity constraints and negative income shocks have any impact on own-to-own residential moves. Taking account of the specific nature of the recourse loan system in Japan, we further investigate whether these effects are different between positive and negative equity households. The estimation results show that housing equity constraints and negative income shocks significantly deter own-to-own residential moves for positive equity households.     

The Association Between Market and Exchange Rate Risks and Accounting Variables: A GARCH Model of the Japanese Banking Institutions

This study has two purposes. First, it estimates the market, interest rate, and exchange rate sensitivities (betas) of the Japanese banking institutions. Second, it investigates the relationship between the market-based measures of risk and accounting-based financial ratios. We extend the literature in three important ways. First, we employ a multi-factor GARCH model to estimate the betas. This framework incorporates non-linearities in the bank stock return modeling and allows for time-varying risk premia. Second, we investigate the determinants of market and exchange rate risk in terms of bank financial ratios. To this end, we regress the beta measures derived from the GARCH model against the corporate decision variables to determine the direction and the magnitude of the impact of the latter on the market and exchange rate risk exposures. Third, by using data on the Japanese banking institutions, we provide a comparison of the bank interest rate and exchange rate sensitivities and the strength of the links between the risk measure and the corporate decision variables between the U.S. and the Japanese banking institutions. This comparison sheds light on the robustness of the results concerning interest rate and exchange rate risk, and their determinants, across the two countries. Several interesting results are obtained. First, empirical results indicate that interest rate is only occasionally significant while market and exchange rate variables are significant for all the banks in the sample. Second, market and exchange rate risk measures do impound information in the financial ratios with the explanatory power of the market beta model being higher than that of the exchange rate beta model. Third, the association of the market-based risk measures and the financial ratios is weaker for the Japanese banks than those found for their U.S. counterparts in the existing literature.JEL Classification: G21, F37     

The Economic Impact of Herd Behavior in the Japanese Loan Market

This paper investigates whether inefficient herd behavior of Japanese financial institutions in the domestic loan market affected the real economy during the period between 1975 and 1999. By using Japanese loan data, arranged by geographical area, we show that loans stemming from inefficient herd behavior of Japanese financial institutions tended to have destabilizing effects on the GDP and land prices in the following years, while ordinary loans of those financial institutions had a more positive impact. Our results indicate that the deterioration of the real economy in the 1990s may have been attributable partly to the inefficient herd behavior in the Japanese loan market during the period of the economic bubble in the late 1980s.     

Spillovers of stock return volatility to Asian equity markets from Japan and the US

This paper examines the magnitude of return and volatility spillovers from Japan and the US to seven Asian equity markets. I construct a volatility spillover model that deals with the US shock as an exogenous variable in a bivariate EGARCH for Japan and Asian markets. First, only the influence of the US is important for Asian market returns; there is no influence from Japan. Second, the volatility of the Asian market is influenced more by the Japanese market than by the US. Third, there exists an adverse influence of volatility from the Asian market to the Japanese market.     

The price of variance risk

Between 1996 and 2014, it was costless on average to hedge news about future variance at horizons ranging from 1 quarter to 14 years. Only unexpected, transitory realized variance was significantly priced. These results present a challenge to many structural models of the variance risk premium, such as the intertemporal CAPM and recent models with Epstein–Zin preferences and long-run risks. The results are also difficult to reconcile with macro models in which volatility affects investment decisions. At the same time, the data allows us to distinguish between different disaster models; a model in which the stock market has a time-varying exposure to disasters and investors have power utility fits the major features of the variance term structure.