A Behavioral Economics Exploration into the Volatility Anomaly（Seiichiro Iwasawa, Tomonori Uchiyama）
Risk Parity Portfolios and the Low-Risk Asset Anomaly （Kozo Omori）
Risk and Return in Japanese Equity Market （Toshiki Honda）
The Securities-Correlation Risks and the Volatility Effects in the Japanese Stock Market （Satoshi Sakamaki）
Long-term Verification of Low Volatility Stock Investment （Toru Yamada）
Information in the JGB Term Structure about Future Real Economic Activity (Makoto Takaoka,Mariko Fujii)
| By Seiichiro Iwasawa | （Professor, Division of Business Administration, The NUCB Graduate School） |
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| By Tomonori Uchiyama | （Head of Quantitative Strategy Group, Equity Quantitative Research Department, Nomura Securities Co.,Ltd.） |
(Abstract)
Contrary to a commonsense view in traditional finance theories to the effect that expected returns on investments in high-risk securities are higher than those in low-risk investments, in the actual stock market, there are negative correlations, respectively, between the beta value of individual securities measured beforehand and the actual returns realized later, and between the idiosyncratic volatility measured beforehand and the actual returns realized later. Here we, based upon the empirical studies of investor behaviors in the Japanese stock market, present the fact that, behind the “beta anomaly,” there is a preference for high-beta securities by typical institutional investors whose mandate is to beat a benchmark, and also that, behind the “idiosyncratic volatility anomaly,” there is a preference for positively skewed securities by individual investors, especially those engaged in margin trading, who overweight low tail probabilities assigned to the state of the world in which they make a lot of money by investing in the positively skewed stock, which could be called a “gambling preference.”
Key words: volatility, anomaly, behavioral bias, institutional investor, individual investor
JEL Classification: G11, G12, G14
| By Kozo Omori | （Investment Officer, Passive and Quantitative Investment Department, Sumitomo Mitsui Trust Bank, Limited） |
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(Abstract)
Recently the portfolio management method called risk parity is attracting attentions for their high performances. This method levels out portfolios’ risk allocations, but very few explanations have been provided for their high performances.
One of exceptions is Asness et al. (2012). Asness et al. (2012) links the discounting of low-risk assets by the leverage aversion to risk parity portfolios. But risks and risk allocations should not be regarded as the same. On the other hand, it is also possible to show that investor overconfidence is a discounting factor for low-risk assets. In this case, as the size of risk allocations in the market is directly linked to either overvaluation or undervaluation, we could get a result supporting risk parity portfolios, which suggests that it is desirable to level out risk allocations by constantly comparing them with the market portfolio.
Here we seek the more appropriate explanation for risk parity portfolios between the leverage aversion and overconfidence, choosing, as a result, the latter as the more plausible explanation. First, we summarize the relationship between the respective implications of the two theories and risk parity portfolios. Next, we conduct a research on bond markets, where we could detect some difference between the leverage aversion and overconfidence. Our empirical study shows that risk parity portfolios demand other explanations than the leverage aversion.
Key words: risk allocation, low-risk asset anomaly, CAPM, market portfolio
JEL classification: G11, G12
| By Toshiki Honda | (Professor, Hitotsubashi University, Graduate School of International Corporate Strategy) |
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(Abstract)
The market portfolio is often used as a benchmark portfolio. Japanese equity market data however shows that the market portfolio is not efficient and furthermore not profitable. The empirical support for CAPM in Japanese market is weak. Overall, Japanese investors experienced hard time, because they used the market portfolio as their benchmark without careful investigation and adopted many active managers against benchmark. Not only because few active managers successfully added value but also because they surely increased the total risk and total cost, the portfolios of Japanese investors typically have shown disappointing performance. However, if portfolios are carefully constructed so that parameter estimation risk is not amplified in the process of portfolio formation, there are some evidences to suggest that past return data contains useful information to identify the risk and return trade-off in Japanese equity market.
Key words: Japanese Equity Market, Capital Asset Pricing Model, Mean-variance portfolio, Minimum variance portfolio
JEL classification: G11, G12
| By Satoshi Sakamaki | （Chief Manager, Asset Management Division, Mitsubishi UFJ Trust and Banking Corporation） |
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(Abstract)
This article decomposes the market volatility risks into the variance components of individual securities and the correlation components regarding upside and downside risks, defining and analyzing the corresponding sub factors to those components, and then studies the nature of the volatility factors as pricing one and explores the relationship between the sensitivity to the market average volatility and the volatility effects.
First, I propose the method of decomposing volatility into the above-mentioned four parts as volatility’s approximate descriptions. Then I apply this approach to the Japanese stock market and can get a high approximate accuracy.
When I analyze the Japanese stock market by using these sub factors, it turns out that the fluctuations of the market volatility are likely to be the risk factors accompanied by the assessment of premiums, and that they are consistent with the volatility effects. They are regarded as showing the demand for hedging against the increase in the market volatility, and the fluctuations in the volatility levels of individual securities are assessed as significant about both upside and downside risks, although to a different degree from each other. On the other hand, although the fluctuation risks of the correlation levels is assessed as not so significant, there is a case where it is assessed as significant as the demand for hedging at the time of high correlations due to stock price drops, and this tendency has become more obvious recently. I study the strategies making use of these natures in our analysis on the future returns. High volatility securities that tend to produce low returns due to the volatility effects rise independently in the bull market and drops together with many other securities in the bear market, showing that I cannot expect the effects of hedging on these securities.
Key words: volatility effects, downside risks, upside risks, average individual securities variance, average correlation coefficient, volatility decomposition
JEL classification: G12
| By Toru Yamada | （Senior Quantitative Analyst, Investment Research & Development Department, Nomura Asset Management Co.,Ltd.） |
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(Abstract)
We verify the long-term performance of low-volatility stocks in the stock markets around the world. A reliable observation becomes possible on the respective stock markets in the United States from the 1920s, in Japan from the 50s and in other developed countries from the 70s, as we use indices by industry, instead of individual stocks.
From the results of our verification, it is observed that low-volatility stock portfolios such as minimum variance portfolios show higher risk-adjusted returns in the long run than the market-value-weighted indices in almost all markets. The spread of returns between the above-mentioned two are broken into two parts; the low-volatility effect, which means that low-volatility stocks produce higher risk-adjusted returns in the future than high-volatility stocks, and the non-market capitalization weighted effect, which means that the more closely the price fluctuations of certain stocks are corresponding to the market-value-weighted indices, the lower their future performances are. More specifically, it seems that low-volatility stock portfolios realize a relatively high performance by holding many low-volatility stocks without weighting them by market value.
Key words: portfolio management, equity strategy, low-volatility effect, minimum variance portfolio, non-market capitalization weighted
JEL classification: G11
| By Makoto Takaoka | (Lecturer, Faculty of Law and Letters, Ryukyu University) |
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| By Mariko Fujii | (Professor, Research Center for Advanced Science and Technology, The University of Tokyo) |
(Abstract)
Many researchers have recognized the potential for the yield curve to provide useful information for predicting future real GDP growth and economic recessions. To illustrate, a number of empirical studies have been conducted, particularly in the United States, to provide evidence for this relationship. Through empirical methods, including regression analysis, many of these studies demonstrate that the widening of the yield spread serves as a predictor of business expansions.
In this study, we empirically examine information related to future real economic activity in the Japanese Government Bond (JGB) yield curve since the 1990s. Specifically, we first calculate the spot rates of JGB drawn from government coupon bond price data between January 1992 and June 2008. Following this, we estimate the three factors that comprise the Nelson-Siegel model of the yield curve: level, slope, and curvature. Subsequently, we provide evidence for relationships between fluctuations of the three factors and fluctuations in GDP growth and recessions over Japan’s three historical business cycles. Through our analysis, we confirm that the curve’s slope and the curve’s curvature may help predict future variations in real economic activity.
Key words: Japanese Government Bond, yield curve, Nelson-Siegel model, business forecasting
JEL classification: E43, E47, E58
Any article in the Review reflects the writer's own opinion, and has nothing to do with any statement issued by the Ministry of Finance or the Policy Research Institute.
