Japanese Stock Market Research Articles

Real Time Updating Genetic Network Programming for Adapting to the Change of Stock Prices

The key in stock trading model is to take the right actions for trading at the right time, primarily based on accurate forecast of future stock trends. Since an effective trading with given information of stock prices needs an intelligent strategy for the decision making, we applied genetic network programming (GNP) to creat a stock trading model. In this paper, we present a new method called real time updating genetic network programming (RTU-GNP) for adapting to the change of stock prices. There are two important points in this paper: First, the RTU-GNP method makes a stock trading decision considering both the recommendable information of technical indices and the change of stock prices according to the real time updating. Second, we combine RTU-GNP with a reinforcement learning algorithm to creat the programs efficiently. The experimental results on the Japanese stock market show that the trading model with the proposed RTU-GNP method outperforms other models without time updating method. It yielded significantly higher profits than the traditional trading model without time uptating. We also compare the experimental results using the proposed method with Buy&Hold method to confirm its effectiveness, and it is clarified that the proposed trading model can obtain much higher profits than Buy&Hold method.

How Do the Time-Varying Risk Prices Behave in Japan? An Investigation with a Multivariate GARCH-CAPM Approach

This paper examines the pricing of month-by-month time-varying risks on the Japanese stock market over the pe- riod from 1981 to 2004. Using the multivariate GARCH model, we tested the conditional version of the Sharpe-Lintner- Mossin CAPM. In contrast to previous studies, we derive and focus strictly on the monthly time-varying risk prices while employing the Fama and French approach by constructing 25 size-ranked and 25 BE/ME-ranked portfolio returns. The em- pirical results show that the price of risk in the conditional version of the Sharpe-Lintner-Mossin CAPM is generally positive and significant when the time-varying covariances from the multivariate GARCH model are used. This provides evidence contrary to the findings of many international studies in which the validity of the traditional CAPM is very often denied.

Macro shocks and the Japanese stock market

The article investigates to what extent various underlying macro (oil, supply, demand and portfolio) shocks impact the fluctuations of Japanese stock prices by developing a multivariate structural vector autoregression (SVAR) model. The results from a Markov regime-switching (MS) specification of the underlying shocks reveal that these shock-generating processes are characterized by nonlinearity with varied turning points and fit well with the actual historical events. Demand shocks, as opposed to supply shocks, are found to render pronounced influence on the stock market dynamics, indicating Japan's anaemic economic growth in the past decades has limited the role of supply shocks. Meanwhile, we find the importance of oil price shocks in driving the stock market as Japan is well synchronized in the world energy market.

Catastrophe effects on stock markets and catastrophe risk securitization

PurposeConventional wisdom states that catastrophe risk securities show no or little correlation with stock and bond markets, and offer significant attractions to investors providing a good diversification of risks. This study examines the correlation between catastrophe risk securities and portfolios of other equities by analyzing catastrophe effects on the Japanese stock market.Design/methodology/approachUsing catastrophe data from SwissRe Sigma publications and stock returns from the Pacific‐Basin Capital Markets database, this paper analyzes stock and abnormal returns in the Japanese stock market using event study methodology.FindingsFor the Japanese stock market as a whole, there is no significant catastrophe effect. The results indicate a significant negative correlation between catastrophe loss amount and the insurance industry's equity returns and abnormal returns, a significant positive correlation with the construction industry, but no significant correlation with the real estate industry. This paper also analyzes the impact of catastrophe causalities. The results show little evidence on the significance of these variables.Originality/valueThis study provides important insights to the insurance/reinsurance industry in the Japanese risk market for catastrophe property and mortality risk securitization and to investors who are interested in further improvement of their portfolio risk/return profile by including catastrophe risk securities.

Volatility return intervals analysis of the Japanese market

We investigate scaling and memory effects in return intervals between price volatilities above a certain threshold q for the Japanese stock market using daily and intraday data sets. We find that the distribution of return intervals can be approximated by a scaling function that depends only on the ratio between the return interval τ and its mean 〈τ〉. We also find memory effects such that a large (or small) return interval follows a large (or small) interval by investigating the conditional distribution and mean return interval. The results are similar to previous studies of other markets and indicate that similar statistical features appear in different financial markets. We also compare our results between the period before and after the big crash at the end of 1989. We find that scaling and memory effects of the return intervals show similar features although the statistical properties of the returns are different.

Jump diffusion model with application to the Japanese stock market

In this paper we demonstrate that a jump diffusion model is better fitted to Japanese stock data in the Nikkei 225 than the classical Black–Scholes (BS) model. In order to check the existence of jumps, we implement the bipower test by Barndorff-Nielsen and Shephard [O.E. Barndorff-Nielsen, N. Shephard, Econometrics of testing for jumps in financial economics using bipower variation, Unpublished discussion paper, Nuffield College, Oxford, 2004], which reveals that Japanese stock data has jumps. For modeling the data, we choose Kou’s [S.G. Kou, A jump diffusion model for option pricing, Manage. Sci. 48 (2002) 1086–1101] model for its tractability and rich theoretical implications. We compare the option prices obtained from Kou’s and BS’ models with real market prices. The comparison study confirms that Kou’s model outperforms the BS model.

Investor biases in Japan: Another pathology of Keiretsu

We examine how keiretsu-related institutional investors behave in the Japanese stock market relative to other investor categories for the period from 1985–1998. Based on the agency problem hypothesis for the general bias of institutional investors and the relational distance hypothesis for the unusual bias of keiretsu-affiliated money managers, this paper finds that keiretsu-affiliated money managers over-invest not only in large firms, but also in imprudent firms. The group affiliation of Japanese domestic money managers may drive their portfolio decisions towards financially weak group member firms at the expense of their client investors. Identifying the conditions for this rescue type of investment, we illustrate a rather weak corporate governance foundation of institutional money management in Japan.

A Recursive Recomputation Approach for Smoothing in Nonlinear State–Space Modeling: An Attempt for Reducing Space Complexity

In this paper, we develop a new generic implementation scheme for numerical smoothing in nonlinear and Bayesian state-space modeling. Our new generic implementation scheme, which we call recursive recomputation scheme, reduces the space complexity from O(MT) to O(M log T), at the cost of O(log T) times computation of filtering distributions in time complexity. This reduction is accomplished by employing carefully designed recursive recomputation. The Japanese stock market price time-series data with T = 956 is taken up as an instance to demonstrate advantage of the proposed scheme. The path-sampling particle smoother is implemented with the scheme to smooth the whole interval estimating the change of volatility. The number of particles is 3 000 000, and the whole interval is smoothed with 5.3-GB storage, accomplishing saving of storage by a factor of 1/20. The computed smoothing distribution is compared with the ones computed with the existing two other well-known smoothers, the forward-backward smoother and the smoother based on two-filter formula. It turns out that, among the three, ours is the only method which succeeded in computing a reliable and plausible smoothing distribution in the situation.

Multifractality and herding behavior in the Japanese stock market

In this paper we present evidence of multifractality and herding behavior for a large set of Japanese stocks traded in the Tokyo Stock Exchange. We find evidence that herding behavior occurs in periods of extreme market movements. Therefore, based on the intuition behind the tests to detect herding phenomenon developed, for instance, in Christie and Huang [Christie W, Huang R. Following the pied pier: do individual returns herd around the market? Financ Analysts J 1995;51:31–7] and Chang et al. [Chang EC, Cheng JW, Khorana A. Examination of herd behavior in equity markets: an international perspective. J Bank Finance 2000;24:1651–99], we suggest that herding behavior may be one of the causes of multifractality.

Group dynamics of the Japanese market

We investigated the network structures of the Japanese stock market using the minimum spanning tree. We defined a grouping coefficient to test the validity of the conventional grouping by industrial categories, and found a decreasing in trend for the coefficient. This phenomenon supports the increasing external influences on the market due to globalization. To reduce this influence, we used S&P500 index as the international market and removed its correlation with every stock. We found stronger a grouping in this measurement when compared to the original analysis, which agrees with our assumption that the international market influences to the Japanese market.

What macro-innovation risks really are priced in Japan?

This article examines whether specified macroeconomic and macro-financial market variables innovations carry risks that are rewarded in the Japanese stock market by a restricted nonlinear multivariate regression model. We find that not all macroeconomic variables priced in the United States are priced in Japan. In addition, we also find, for the first time, that two additional macro-factors, namely the innovations in money supply and in gold and foreign exchange reserves, are strongly priced in Japan. Furthermore, neither market portfolio nor oil price variables are priced separately, as with the evidence from the United States. However, differently from previous US results, we find that innovations in aggregate real per capita consumption are weakly priced in Japan.

International linkages of the Japanese stock market

Using daily open-to-close and close-to-open stock prices, this paper examines whether there are any lead–lag relationships between the Tokyo Stock Exchange and the other G7 stock markets. In particular, this paper analyzes whether the movements of other markets in the preceding trading session can be used to formulate profitable strategies to trade in Nikkei.

Sources of contrarian profits in the Japanese stock market

This paper investigates the profitability of contrarian strategies on the Tokyo Stock Exchange (TSE) across various ranking and holding horizons ranging from 1 month to 3 years. In sharp contrast to the evidence from the U.S. and European markets, our data show that contrarian strategies are profitable in Japan across all horizons, especially with a very short horizon of 1 month or a very long horizon of 2 years or longer. The results are very robust to skipping 1 month between the holding and ranking periods, excluding firms with extreme past returns, and partitioning the whole sample into bull and bear subperiods. In addition, we find that contrarian strategies perform much better when the aggregate market also performs better in either the ranking or the holding period. Finally, contrarian profits are mostly attributed to the lead–lag effect. Further analysis indicates that contrarian profits are not attributed to the pricing errors of the Fama–French three-factor model. Instead, contrarian profits are mainly due to cross-autocorrelations among firm-specific error components of the Fama–French three-factor model.

Tick size change and liquidity provision for Japanese stock trading near ¥1000

Bessembinder [Bessembinder, H., 2000. Tick size, spreads, and liquidity: an analysis of NASDAQ securities trading near ten dollars, Journal of Financial Intermediation 9, 213–239] examines the effect of tick size changes from US$ 1/32 to US$ 1/8 on NASDAQ stocks when the stock prices pass US$ 10. In contrast with NASDAQ, the Tokyo Stock Exchange (TSE) strictly enforces the price and time precedence rule. The TSE is also one of the largest limit-order markets using a tick size that is a step function of share price. The threshold, at ¥1000, is the most important among several other price levels. The minimum tick size increases from ¥1 to ¥10 when stock prices rise from below ¥1000 to above ¥1000. This large change in tick size and its effects on market quality have interested researchers for a long time [Amihud, Y., Mendelson, H. 1991. Volatility, efficiency and trading: evidence from the Japanese stock market, Journal of Finance 46, 1765–1789; Harris, L., 1994. Minimum price variations, discrete bid-ask spreads, and quotation sizes, Review of Financial Studies 7, 149–178], but they have never been examined. This study considers the impact of the change in minimum tick size on liquidity provisions as TSE stock prices cross the ¥1000 threshold. The empirical results provide some new insights regarding the effects of endogenous tick size changes.

Who Moves the Malaysian Stock Market— the U.S. or Japan?: Empirical Evidence from the Pre-, During, and Post-1997 Asian Financial Crisis

This paper examines long run co-movements between Malaysian stock market and the two largest stock markets in the world: the U.S. and Japan. By employing time-series analysis, i.e., cointegration, variance decompositions, and impulse response functions, the paper seeks to investigate which market actually leads the Malaysian stock market before, during, and after the 1997 Asian financial crisis periods. The results indicate that there is a co-movement of these markets only in the post crisis period. The Japanese stock market is found to significantly move the Malaysian stock market compared to U.S. stock market for the post-crisis period. At the same time, there seems to be a growing proportion of bilateral trade between Malaysia and Japan during the mentioned period. This finding seems to be consistent with the view that the stronger the bilateral trade ties between two countries, the higher the degree of co-movements (Masih and Masih 1999; Bracker et al. 1999; Pretorius 2002; Ibrahim 2003; Kearney and Lucey 2004). Our finding implies that the opportunities of gaining abnormal profits through investment diversification during the post-crisis period in the Malaysian and Japanese stock markets are diminishing as the markets move towards a greater integration. This further implies that any development in the Japanese economy has to be taken into consideration by the Malaysian government in designing policies pertaining to Malaysian stock market.

The Cross-Country Barometer Effect of Stock Market: Evidence from U.S. and Japan

In this paper, we investigate the argument that stock market is a barometer of economy in the context of cross-country effect between the U.S. and Japan. With grouped multivariate autoregressive model, Geweke linear dependence and spectral feedback between one country's stock market and the other country's macro economy was examined. A computing program for Geweke linear dependence and feedback spectrum of grouped VAR was developed and used. It is found that the U.S. stock market can be a barometer of Japanese economy in long run, while Japanese stock market's barometer effect to the U.S. economy is limited.

Comovements in international stock markets

In the paper monthly realized moments for stock market returns for the US, the UK, Germany and Japan are employed to assess the linkages holding across moments and markets over the period 1973–2004. In the light of the theoretical framework proposed in the paper, the results point to a progressive integration of the four stock markets, leading to increasing comovements in prices, returns, volatilities and correlations. Evidence of a positive and non spurious linkage between volatility and correlation, and a trend increase in correlation coefficients over time, is also found. All the above mentioned linkages seem to be particularly strong for the US and Europe, while the persistent stagnation of the economy and the weak fundamentals over the 1990s may have been the cause of the more idiosyncratic behavior of the Japanese stock market.

Interrelationships among stock prices of Taiwan and Japan and NTD/Yen exchange rate

Since the Asian Financial Crisis in 1997, the relationship between stock prices and exchange rates has received considerable amount of attention from the economists, international investors and policy makers. The work reported here employs various linear and non-linear, time-series methodologies to investigate the short-term and long-term interrelationships among the stock prices of Taiwan and Japan and the NTD/Yen exchange rate during the period of January 1991–July 2005. The findings from this study include: firstly, the stock prices of Taiwan and Japan impact each other for short durations; secondly, with regard to relationship between stock prices and exchange rates, the portfolio approach is supported for the short-term and the traditional approach is more plausible for the long-term in the Taiwanese financial market, whereas the portfolio approach is not suitable for the Japanese stock market; and thirdly, there appears to be no long-term relation between NTD/Yen exchange rate and the stock prices of Taiwan and Japan.

International Spillover of Economic Fluctuations: A Dynamic Optimization Approach

After the 1990 Japanese stock market crash the Japanese economy began to stagnate whereas the U.S. economy began to expand, yet the yen tended to appreciate against the dollar. Such a phenomenon is difficult to explain in conventional models. This paper examines its mechanism using a two-country dynamic model that accommodates a liquidity trap and unemployment. If the marginal utility of consumption relative to that of liquidity declines in a country, its current account improves, which appreciates the home currency against the foreign currency. Consequently, home products lose competitiveness, causing home employment to decrease and foreign employment to increase.

Addition to the Nikkei 225 Index and Japanese market response: Temporary demand effect of index arbitrageurs

We examine the Japanese stock market response to additions to the Nikkei 225 Index from 1991 to 2002. Similar to the reactions in the U.S. markets, the stock prices of the added firms go up on the announcement date, continue to increase until the day before the effective change date, and then decrease on and just after the change date. The stock price increase in this run-up period is thus temporary, as it is canceled out by the decline that begins on the change date. We also find that the excess demand of index arbitrageurs for shares of newly added firms is the main source of the temporary stock price increase.