Title: Risk premia dynamics of the Japanese financial markets
Authors: Torben Andersen - Northwestern University (United States)
Viktor Todorov - Northwestern University (United States)
Masato Ubukata - Meiji Gakuin University (Japan) [presenting]
Abstract: The focus is on the predictability of the aggregate stock market returns in Japan. The Japanese market is notoriously difficult to forecast using standard predictive indicators, that are successful for other national indices. Specifically, we test whether the diffusive and jump components of the variance risk premium predict the Japanese returns. Using largely nonparametric risk measures for three major indices, S\&P 500, Nikkei 225 and FTSE 100, we first show that country-specific regressions for Japan -- contrary to the other countries -- produce insignificant predictability patterns. Second, however, we also show that the US left jump variation (LJV) -- a proxy for the fear component of the tail risk premium -- helps forecast the Japanese excess returns, especially when measured in US dollars. Thus, the dollar-denominated Japanese returns are predictable through the identical mechanism as for the other indices. Moreover, there is a large degree of foreign ownership of Japanese equities. This suggests that the Japanese market is well integrated with the global markets, and is priced accordingly. Third, consistent with the reasoning above, we also find that the US LJV, or the discrepancy between the US and Japanese LJV, have explanatory power for the dollar-yen exchange rate returns.