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Banks' Stockholdings and the Correlation between Bonds and Stocks: A Portfolio Theoretic Approach

Author

Listed:
  • Yoshiyuki Fukuda

    (Bank of Japan)

  • Kazutoshi Kan

    (Bank of Japan)

  • Yoshihiko Sugihara

    (Bank of Japan)

Abstract

In this paper, we analyze the optimal asset composition ratio of stocks and bonds for a bank taking into consideration the correlation between the interest rate risk and equity risk in the financial capital market using a portfolio model. The analysis reveals that in determining the asset composition ratio in Japan, the correlation coefficient between the interest rate and stock prices as well as the stock price volatility plays a more important role than the interest rate volatility. We also show that in the present circumstances, the stockholding ratios of most financial institutions in Japan are higher than the levels calculated from the model. It is suggested that when the market is exposed to severe stress such as a surge in stock price volatility or reversal of the correlation between the interest rate and stock prices, the stockholding ratios would be even more excessive than the levels obtained from the model.

Suggested Citation

  • Yoshiyuki Fukuda & Kazutoshi Kan & Yoshihiko Sugihara, 2013. "Banks' Stockholdings and the Correlation between Bonds and Stocks: A Portfolio Theoretic Approach," Bank of Japan Working Paper Series 13-E-6, Bank of Japan.
    • Handle: RePEc:boj:bojwps:13-e-6
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    References listed on IDEAS

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    1. Konno, Hiroshi & Kobayashi, Katsunari, 1997. "An integrated stock-bond portfolio optimization model," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1427-1444, June.
    2. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    3. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Toshinao Yoshiba, 2013. "Risk Aggregation by a Copula with a Stressed Condition," Bank of Japan Working Paper Series 13-E-12, Bank of Japan.

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