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Market Evaluations of Banking Fragility in Japan: Japan Premium, Stock Prices, and Credit Derivatives

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  • Takatoshi Ito
  • Kimie Harada

Abstract

This paper investigates movements of market indicators of banking fragility, namely, Japan premium, stock prices, and credit derivative spreads of Japanese banks. Although the Japan premium in the euro-dollar market seemed to have virtually disappeared since April 1999, credit and default risks of Japanese banks has not necessarily disappeared. Other indicators show varying degrees of fragility among Japanese banks in 1998-2001. Banking stock prices continue to slide compared to the market-wide stock price index. From pricing of credit derivatives, default probabilitie of banks can be etracted. Correlations among indicators were high both in the first period and in the second period; Credit default swap (CDS) premium explains Japan premium with a significant, positive coefficient. The higher the CDS is, lower go the stock prices. Before the capital injection of 1999, the markets were more sensitive to bank vulnerability and higher premiums were required

Suggested Citation

  • Takatoshi Ito & Kimie Harada, 2003. "Market Evaluations of Banking Fragility in Japan: Japan Premium, Stock Prices, and Credit Derivatives," NBER Working Papers 9589, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9589
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    References listed on IDEAS

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    1. Peek, Joe & Rosengren, Eric S., 2001. "Determinants of the Japan premium: actions speak louder than words," Journal of International Economics, Elsevier, vol. 53(2), pages 283-305, April.
    2. Robert Neal, 1996. "Credit derivatives: new financial instruments for controlling credit risk," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 15-27.
    3. Takatoshi Ito & Kimie Harada, 2005. "Japan premium and stock prices: two mirrors of Japanese banking crises," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(3), pages 195-211.
    4. Ryuzo Sato & Rama V. Ramachandran & Bohyong Kang, 1990. "Risk Adjusted Deposit Insurance for Japanese Banks," NBER Working Papers 3314, National Bureau of Economic Research, Inc.
    5. Saito, Makoto & Shiratsuka, Shigenori, 2001. "Financial Crises As the Failure of Arbitrage: Implications for Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 239-270, February.
    6. Adam S. Posen, 2001. "Unchanging Innovation and Changing Economic Performance in Japan," Working Paper Series WP01-5, Peterson Institute for International Economics.
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    1. Takatoshi Ito & Kimie Harada, 2005. "Japan premium and stock prices: two mirrors of Japanese banking crises," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(3), pages 195-211.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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