CB – Time Dependent Markov Model for Pricing Convertible Bonds

In this paper, we propose what we call the convertible bond (CB) – timedependent Markov model, which prices N given individual convertible bondssimultaneously, and apply it to Japanese convertible bond data. One of themain features of the model is that it makes full use of the correlationstructure of convertible bond prices. The empirical results show that themodel well describes individual prices in the market.     

Empirically Effective Bond Pricing Model and Analysis on Term Structures of Implied Interest Rates in Financial Crisis

In his book (1993) Kariya proposed a government bond (GB) pricing model that simultaneously values individual fixed-coupon (non-defaultable) bonds of different coupon rates and maturities via a discount function approach, and Kariya and Tsuda (Financ Eng Japanese Mark 1:1–20, 1994) verified its empirical effectiveness of the model as a pricing model for Japanese Government bonds (JGBs) though the empirical setting was limited to a simple case. In this paper we first clarify the theoretical relation between our stochastic discount function approach and the spot rate or forward rate approach in mathematical finance. Then we make a comprehensive empirical study on the capacity of the model in view of its pricing capability for individual GBs with different attributes and in view of its capacity of describing the movements of term structures of interest rates that JGBs imply as yield curves. Based on various tests of validity in a GLS (Generalized Least Squares) framework we propose a specific formulation with a polynomial of order 6 for the mean discount function that depends on maturity and coupon as attributes and a specific covariance structure. It is shown that even in the middle of the Financial Crisis, the cross-sectional model we propose is shown to be very effective for simultaneously pricing all the existing JGBs and deriving and describing zero yields.     

Pricing Mortgage-Backed Securities (MBS)

This paper presents a pricing formula for MBSs andproposes a specific model for MBS prices thatdescribes the so-called burnout phenomenon ofprepayments due to refinancing. A numerical exampleof the model is demonstrated by Monte Carlosimulation. An estimation procedure is alsodescribed.     

An implementation of the HJM model with application to Japanese interest futures

In this paper, we propose a new specification of the forward rate model of Heath, Jarrow and Morton [5] and apply it to the Japanese 3 month interest rate futures. Our empirical result shows that the model we propose can capture the forward interest rate movement.     

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 Credit Risk of Individual Corporate Bonds in US Energy Sector

In this paper, using the measures of the credit risk price spread (CRiPS) and the standardized credit risk price spread (S-CRiPS) proposed in Kariya’s (A CB (corporate bond) pricing model for deriving default probabilities and recovery rates. Eaton, IMS Collection Series: Festschrift for Professor Morris L., 2013) corporate bond model, we make a comprehensive empirical credit risk analysis on individual corporate bonds (CBs) in the US energy sector, where cross-sectional CB and government bond price data is used with bond attributes. Applying the principal component analysis method to the S-CRiPSs, we also categorize individual CBs into three different groups and study on their characteristics of S-CRiPS fluctuations of each group in association with bond attributes. Secondly, using the market credit rating scheme proposed by Kariya et al. (2014), we make credit-homogeneous groups of CBs and show that our rating scheme is empirically very timely and useful. Thirdly, we derive term structures of default probabilities for each homogeneous group, which reflect the investors’ views and perspectives on the future default probabilities or likelihoods implicitly implied by the CB prices for each credit-homogeneous group. Throughout this paper it is observed that our credit risk models and the associated measures for individual CBs work effectively and can timely provide the market credit information evaluated by investors.     

A New Control Variate Estimator for an Asian Option

There exist several estimators for valuing the Asian option on the arithmetic mean. Among all variance reduction estimators, the one with the control variate derived from the geometric mean has been shown by Boyle et al. (1997) to perform best so far. In this paper, a new improved control variate estimator for this type of Asian option is proposed and investigated. Simulation results confirm that it does perform better than the control variate derived from the geometric mean. The improvement becomes more significant as the volatility increases and/or as the time to expiration lengthens.     

New bond pricing models with applications to Japanese data

In this paper, the cross-sectional bond pricing model for individual bonds Kariya (1993) proposed by formulating stochastic discount function (term structure) is first applied to Japanese Government bond (JG-bond) data. The model performs very well as it stands. Second, we generalize the cross-sectional model to two types of time-dependent Markov models (TDM's) with the term structure of discount rates of each bond att being dependent on the one att−1, and apply them to the same data to find significantly improved results over those of the cross-sectional model. In fact, almost all the differences between actual prices and model values are less than 0.5 yen in each month over 12 years, implying that the error rate is less than 0.5%. On the basis of our analysis, we propose a TDM as a model for JG-bond trading.     

Testing Gaussianity and Linearity of Japanese Stock Returns

In this article, we first investigate the Gaussianity of Japanese stock return time series (214 daily, 18 weekly) by the Gaussianity test proposed by Kariya, Tsay, Terui and Li (1994) comprehensively and consistently. And it is observed that all the series are not Gaussian when the 6th order moment structures are taken into account. Up to the 4th order moments there are some series which are compatible with the Gaussianity. Secondly, we apply five well-known nonlinearity tests for stationary time series to the data set and examine the specific nonlinearity of the series. Some series strongly exhibit the specific types of nonlinearity. Typically the Nikkei daily index shows the TAR (Threshold Autoregressive) type nonlinearity. Comparing daily return series with weekly series, it is also shown that a central limit effect is working on the weekly stock returns, where daily information is accumulated over a week, in the sense that weekly returns are relatively closer to Gaussian.