IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Expected return, liquidity risk, and contrarian strategy: evidence from the Tokyo Stock Exchange

  • Keiichi Kubota
  • Hitoshi Takehara
Registered author(s):

    Purpose – The purpose of this paper is to determine the best conditional asset pricing model for the Tokyo Stock Exchange sample by utilizing long-run daily data. It aims to investigate whether there are any other firm-specific variables that can explain abnormal returns of the estimated asset pricing model. Design/methodology/approach – The individual firm sample was used to conduct various cross-sectional tests of conditional asset pricing models, at the same time as using test portfolios in order to confirm the mean variance efficiency of basic unconditional models. Findings – The paper's multifactor models in unconditional forms are rejected, with the exception of the five-factor model. Further, the five-factor model is better overall than the Fama and French model and other alternative models, according to both the Gibbons, Ross, and Shanken test and the Hansen and Jagannathan distance measure test. Next, using the final conditional five-factor model as the de facto model, it was determined that the turnover ratio and the size can consistently predict Jensen's alphas. The book-to-market ratio (BM) and the past one-year returns can also significantly predict the alpha, albeit to a lesser extent. Originality/value – In the literature related to Japanese data, there has never been a comprehensive test of conditional asset pricing models using the long-run data of individual firms. The conditional asset pricing model derived for this study has led to new findings about the predictability of past one-year returns and the turnover ratio.

    If 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.

    File URL: http://www.emeraldinsight.com/journals.htm?issn=0307-4358&volume=36&issue=8&articleid=1865456&show=abstract
    Download Restriction: Cannot be freely downloaded

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 36 (2010)
    Issue (Month): 8 (August)
    Pages: 655-679

    as
    in new window

    Handle: RePEc:eme:mfipps:v:36:y:2010:i:8:p:655-679
    Contact details of provider: Web page: http://www.emeraldinsight.com

    Order Information: Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
    Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=mf Email:


    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Jagannathan, Ravi & Kubota, Keiichi & Takehara, Hitoshi, 1998. "Relationship between Labor-Income Risk and Average Return: Empirical Evidence from the Japanese Stock Market," The Journal of Business, University of Chicago Press, vol. 71(3), pages 319-47, July.
    2. Acharya, Viral V & Pedersen, Lasse Heje, 2003. "Asset Pricing with Liquidity Risk," CEPR Discussion Papers 3749, C.E.P.R. Discussion Papers.
    3. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing specification errors in stochastic discount factor models," Staff Report 167, Federal Reserve Bank of Minneapolis.
    4. Ferson, Wayne E & Schadt, Rudi W, 1996. " Measuring Fund Strategy and Performance in Changing Economic Conditions," Journal of Finance, American Finance Association, vol. 51(2), pages 425-61, June.
    5. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    6. Keiichi Kubota & Hitoshi Takehara, 2003. "Financial Sector Risk and the Stock Returns: Evidence from Tokyo Stock Exchange Firms," Asia-Pacific Financial Markets, Springer, vol. 10(1), pages 1-28.
    7. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
    8. John H. Cochrane, 1999. "Portfolio Advice for a Multifactor World," CRSP working papers 491, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    9. Hodrick, Robert J. & Zhang, Xiaoyan, 2001. "Evaluating the specification errors of asset pricing models," Journal of Financial Economics, Elsevier, vol. 62(2), pages 327-376, November.
    10. Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, vol. 96(2), pages 175-194, May.
    11. Kent Daniel, 2001. "Explaining the Cross-Section of Stock Returns in Japan: Factors or Characteristics?," Journal of Finance, American Finance Association, vol. 56(2), pages 743-766, 04.
    12. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
    13. Keiichi Kubota & Kazuyuki Suda & Hitoshi Takehara, 2009. "Common Risk Factors Versus a Mispricing Factor of Tokyo Stock Exchange Firms: Inquiries into the Fundamental Value Derived from Analyst Earnings Forecasts-super-," International Review of Finance, International Review of Finance Ltd., vol. 9(3), pages 269-294.
    14. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    15. Doron Avramov & Tarun Chordia, 2006. "Asset Pricing Models and Financial Market Anomalies," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 1001-1040.
    16. Grinblatt, Mark & Titman, Sheridan, 1987. "The Relation between Mean-Variance Efficiency and Arbitrage Pricing," The Journal of Business, University of Chicago Press, vol. 60(1), pages 97-112, January.
    17. Jay Shanken & Guofu Zhou, 2007. "Estimating and testing beta pricing models: Alternative methods and their performance in simulations," CEMA Working Papers 275, China Economics and Management Academy, Central University of Finance and Economics.
    18. Luboš Pástor & Robert F. Stambaugh, . "Liquidity Risk and Expected Stock Returns," CRSP working papers 531, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    19. Black, Fischer & Scholes, Myron, 1974. "The effects of dividend yield and dividend policy on common stock prices and returns," Journal of Financial Economics, Elsevier, vol. 1(1), pages 1-22, May.
    20. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    21. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-52, September.
    22. Lewellen, Jonathan & Nagel, Stefan, 2003. "The Conditional CAPM Does Not Explain Asset-pricing Anomalies," Working papers 4427-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    23. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    24. Chou, Pin-Huang & Wei, K.C. John & Chung, Huimin, 2007. "Sources of contrarian profits in the Japanese stock market," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 261-286, June.
    25. Jonathan B. Berk, 2000. "Sorting Out Sorts," Journal of Finance, American Finance Association, vol. 55(1), pages 407-427, 02.
    26. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August.
    27. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    28. Liu, Weimin, 2006. "A liquidity-augmented capital asset pricing model," Journal of Financial Economics, Elsevier, vol. 82(3), pages 631-671, December.
    29. Sadka, Ronnie, 2006. "Momentum and post-earnings-announcement drift anomalies: The role of liquidity risk," Journal of Financial Economics, Elsevier, vol. 80(2), pages 309-349, May.
    30. Lesmond, David A & Ogden, Joseph P & Trzcinka, Charles A, 1999. "A New Estimate of Transaction Costs," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1113-41.
    31. Iihara, Yoshio & Kato, Hideaki Kiyoshi & Tokunaga, Toshifumi, 2004. "The winner-loser effect in Japanese stock returns," Japan and the World Economy, Elsevier, vol. 16(4), pages 471-485, December.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eme:mfipps:v:36:y:2010:i:8:p:655-679. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.