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Idiosyncratic Risk and the Creative Destruction in Japan

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  • Yasushi Hamao
  • Jianping Mei
  • Yexiao Xu

Abstract

The dramatic rise and fall of the Japanese equity market provides a unique opportunity to examine market-and firm-specific risks over different market conditions. The price behavior of Japanese equities in the 1990s is found to resemble that of U.S. equities during the Great Depression. Both show increasing market volatility and a prolonged large co-movement in equity prices. What is unique about the Japanese case is the surprising fall in firm-level volatility and turnover in Japanese stocks after its market crash in 1990. This large decrease in firm-level volatility may have impeded Japan's capital formation process as it has become more difficult over the past decade for both investors and managers to separate high quality from low quality firms. Using data on firm performance fundamentals and corporate bankruptcies, we show that the fall in firm-level volatility and turnover in Japanese stocks could be attributed to the sharp increase in earnings homogeneity among Japanese firms and the lack of corporate restructuring.

Suggested Citation

  • Yasushi Hamao & Jianping Mei & Yexiao Xu, 2003. "Idiosyncratic Risk and the Creative Destruction in Japan," NBER Working Papers 9642, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9642 Note: AP EFG IFM
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Brockman, Paul & Liebenberg, Ivonne & Schutte, Maria, 2010. "Comovement, information production, and the business cycle," Journal of Financial Economics, Elsevier, vol. 97(1), pages 107-129, July.
    2. repec:wsi:rpbfmp:v:10:y:2007:i:03:n:s0219091507001070 is not listed on IDEAS
    3. Woon Gyu Choi & David Cook, 2006. "Stock Market Liquidity and the Macroeconomy: Evidence from Japan," NBER Chapters,in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 309-340 National Bureau of Economic Research, Inc.
    4. Rossi, Francesco, 2011. "U.K. cross-sectional equity data: do not trust the dataset! The case for robust investability filters," MPRA Paper 38303, University Library of Munich, Germany, revised Nov 2011.
    5. Michael Drew & Alastair Marsden & Madhu Veeraraghavan, 2004. "Idiosyncratic Volatility Matter? New Zealand Evidence," School of Economics and Finance Discussion Papers and Working Papers Series 177, School of Economics and Finance, Queensland University of Technology.
    6. Nguyen, Pascal, 2012. "The impact of foreign investors on the risk-taking of Japanese firms," Journal of the Japanese and International Economies, Elsevier, vol. 26(2), pages 233-248.
    7. Rossi, Francesco, 2012. "UK cross-sectional equity data: The case for robust investability filters," European Economic Letters, European Economics Letters Group, vol. 1(1), pages 6-13.
    8. Rossi, Francesco, 2011. "Risk components in UK cross-sectional equities: evidence of regimes and overstated parametric estimates," MPRA Paper 38682, University Library of Munich, Germany, revised 31 Mar 2012.
    9. Se-Jik Kim, 2003. "Macro Effects of Corporate Restructuring in Japan," IMF Working Papers 03/203, International Monetary Fund.
    10. Cotter, John & Sullivan, Niall O' & Rossi, Francesco, 2015. "The conditional pricing of systematic and idiosyncratic risk in the UK equity market," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 184-193.
    11. Nguyen, Pascal, 2011. "Corporate governance and risk-taking: Evidence from Japanese firms," Pacific-Basin Finance Journal, Elsevier, vol. 19(3), pages 278-297, June.
    12. Naomi Griffin & Kazuhiko Odaki, 2009. "Reallocation and productivity growth in Japan: revisiting the lost decade of the 1990s," Journal of Productivity Analysis, Springer, vol. 31(2), pages 125-136, April.
    13. Hui Guo & Robert Savickas, 2006. "Aggregate idiosyncratic volatility in G7 countries," Working Papers 2004-027, Federal Reserve Bank of St. Louis.
    14. Naomi N. Griffin, 2005. "Labor Adjustment, Productivity and Output Volatility: An Evaluation of Japan's Employment Adjustment Subsidy: Working Paper 2005-10," Working Papers 17567, Congressional Budget Office.
    15. Hsin, Chin-Wen & Tseng, Po-Wen, 2012. "Stock price synchronicities and speculative trading in emerging markets," Journal of Multinational Financial Management, Elsevier, vol. 22(3), pages 82-109.
    16. Naomi N. Griffin & Kazuhiko Odaki, 2006. "Reallocation and Productivity Growth in Japan: Revisiting the Lost Decade of the 1990s: Working Paper 2006-02," Working Papers 17603, Congressional Budget Office.

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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