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Risk taking by Japanese bond investors: Testing the "reach for yields" hypothesis in the Japanese bond markets

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  • Nishioka, Shinichi
  • Baba, Naohiko
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    Abstract

    This paper attempts to test the "reach for yields" hypothesis in the Japanese bond markets to explore the cause of extremely low credit spreads on Japanese bonds, especially BBB-rated bonds, using a three-factor CAPM ([gamma]-CAPM) with (co)skewness as an additional market risk factor. Under the [gamma]-CAPM, risk premium can be expressed as a weighted average of [beta]-risk and [gamma]-risk. Empirical results support the [gamma]-CAPM against the [beta]-CAPM. The estimated weight of [gamma]-risk is 2.6 percent in Japan, compared with 12.5 percent in the United States. This difference mainly reflects a lower degree of relative risk aversion in Japan.

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    Bibliographic Info

    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 48 (2008)
    Issue (Month): 4 (November)
    Pages: 691-707

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    Handle: RePEc:eee:quaeco:v:48:y:2008:i:4:p:691-707

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    Web page: http://www.elsevier.com/locate/inca/620167

    Related research

    Keywords: CAPM Reach for yields Corporate bonds Skewness Risk aversion;

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