Aggregate Risk in Japanese Equity Markets
AbstractIn the past decade Japanese households have been buffeted by some big aggregate shocks. Economic growth has slowed, unemployment risk has risen, and asset prices have fallen to levels not seen since the early 1980's. These shocks have hit both households' financial and human capital. This paper develops a framework for identifying the sources of these shocks and a way to measure how household assessments of these risks vary over time. We consider the perspective of a forward-looking risk-averse household and derive expected returns and time-varying risk premia for each risk factor. We then construct times-series of historical expected risk premia using Japanese data on industry returns. An analysis of this data provides four main findings. First, prior to 1984 expected risk premia on identified goods market shocks, monetary policy and financial market risk are all important determinants of industry level expected returns. Second, starting in 1984 households perceive that the risk from financial shocks is increasing and demand higher risk premia to hold this risk. Third, between 1987 and 1990 risk premia on monetary policy are large and positive. Monetary policy is perceived to be adding to financial risk. Fourth, in 1990 as expected risk premia on financial risk shoot up, expected risk premia on monetary policy shocks turn negative for all industry returns. As stock prices collapse between 1990 and 1995, monetary policy shocks play an important role in hedging risk emanating from the financial sector.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-250.
Length: 40 pages
Date of creation: Dec 2003
Date of revision:
Contact details of provider:
Postal: Hongo 7-3-1, Bunkyo-ku, Tokyo 113-0033
Web page: http://www.cirje.e.u-tokyo.ac.jp/index.html
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-12-07 (All new papers)
- NEP-FIN-2003-12-07 (Finance)
- NEP-RMG-2003-12-07 (Risk Management)
- NEP-SEA-2003-12-07 (South East Asia)
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CIRJE administrative office).
If references are entirely missing, you can add them using this form.