Discussion Papers
Findings from research and studies conducted at the Financial Research Center (FSA Institute) are organized and published as Discussion Papers to stimulate further discussion and comment.
The views expressed in the papers are those of the authors and do not necessarily reflect the views of the Financial Services Agency or the FSA Institute.
Discussion Papers (FY 2010)
For past discussion papers, please see Discussion Papers (FY 2004-2009).
| No. | Title/Author(s) |
|---|---|
| DP2010-6 (March 2011) |
The Determinants of Japanese firms' CDS Spreads Koichi Iwai Abstract |  Full text（PDF：1109K）（Full text is available only in Japanese.） |
| DP2010-5 (March 2011) |
Inefficiency in the Japanese ETF Market Koichi Iwai Abstract | Full text（PDF：1304K）（Full text is available only in Japanese.） |
| DP2010-4 (March 2011) |
Financial Integration and International Portfolio Diversification from Japanese Investors' Viewpoint Koichi Iwai Abstract | Full text（PDF：1176K）（Full text is available only in Japanese.） |
| DP2010-3 (March 2011) |
Pro-cyclicality of The Basel Capital Requirement Ratio and Its Impact on Banks Naoyuki Yoshino and Tomohiro Hirano Abstract | Full text（PDF：380K） |
| DP2010-2 (March 2011) |
Financial Institution, Asset Bubbles and Economic Performance Tomohiro Hirano and Noriyuki Yanagawa Abstract | Full text（PDF：539K） |
| DP2010-1 (March 2011) |
Asset Bubbles, Endogenous Growth, and Financial Frictions Tomohiro Hirano and Noriyuki Yanagawa Abstract | Full text（PDF：667K） |
Abstracts
DP2010-6
''The Determinants of Japanese firms' CDS Spreads''
Koichi Iwai, Research Fellow, Financial Research Center (FSA Institute)
This paper analyzes the determinants of Japanese non-financial companies' CDS spreads over the period before and after the Global Financial Crisis (GFC). We use both the structural variables and other state variables that previous literature has found to have an impact on CDS spreads as possible determinants. Empirical analyses show several interesting phenomena, some of which have not been detected in previous research. First, the explanatory power of the estimated models is limited, while the signs of the coefficients of the independent variables are in line with the structural approach (Merton, 1974) and previous literature. Second, sub-sample estimation reveals that the estimation power improves after the onset of the GFC, which reflects the fact that uncertainty in the U.S. equity market has exerted a great influence on the Japanese CDS market. Third, using principal component analysis we also show that since the beginning of the crisis, CDS spreads have been increasingly driven by an unobservable common factor.
Key words：Credit Default Swap spread, Structural Model (Merton Model), Dynamic Heterogeneous Panel Model
DP2010-5
''Inefficiency in the Japanese ETF Market''
Koichi Iwai, Research Fellow, Financial Research Center (FSA Institute)
This paper examines market efficiency in the Japanese ETF market. Using several efficiency indicators, we find that the degree of inefficiency of Japanese ETFs is at the same level as that of foreign equity ETFs listed on the U.S. market. We further investigate the causes of the inefficiency, incorporating possible effects of the unique market microstructure in Japan on price formation. Empirical analyses suggest that both low liquidity and a lack of several institutions — market makers with affirmative liquidity obligations, the Indicative NAV and the Portfolio Composition File — seem to contribute to the inefficient price formation. We recommend some measures to improve the efficiency and functions of the Japanese ETF market.
Key words：ETF, market efficiency, arbitrage trading, market microstructure
DP2010-4
''Financial Integration and International Portfolio Diversification from Japanese Investors' Viewpoint''
Koichi Iwai, Research Fellow, Financial Research Center (FSA Institute)
Financial integration is one of today's hottest policy issues and most important research topics in international financial literature. This paper focuses on the effect of financial integration on international investment from the perspectives of Japanese investors. Theoretical considerations suggest that financial integration would mainly have an effect on investors through the changes in the benefit of diversification.
Cointegration analyses show that Japanese investors were able to benefit from international portfolio diversification in the long term after the mid 1990s. On the other hand, using the Dynamic Conditional Correlation GARCH model, we find that there seems to have been a significant increase in the correlation of short-run stock market returns for Japan and overseas markets in the past few years, which suggests that the benefit of diversification may have decreased recently. We find the opposite patters for the in-and-out bond returns, i.e., bond investors have been able to enjoy international diversification benefits in these several years.
Although there has been a modest trend towards further diversification over the last five to ten years, we could identify the underinvestment in foreign assets by Japanese investors. Institutional settings should be improved to facilitate the development of many investment vehicles that enable more cost efficient international diversification.
Key words：Financial integration, international diversification, home-bias, Gregory & Hansen Cointegration Test, DCC-GARCH Model
DP2010-3
''Pro-cyclicality of The Basel Capital Requirement Ratio and Its Impact on Banks''
Naoyuki Yoshino, Director of Financial Research Center (FSA Institute) and Professor of Economics, Keio University
Tomohiro Hirano, Research Fellow, Financial Research Center (FSA Institute)
This paper focuses on the role of the Basel capital requirement and proposes a new counter-cyclical measure by using a simple general equilibrium model.
This paper will address the following issues.
(i) The Basel capital requirement ratio should depend on various economic factors such as GDP, stock prices, interest rates and land prices, based on a simple general equilibrium model in order to cope with pro-cyclicality. Otherwise expansion of bank loans will be enhanced during boom period while facing credit crunch in sluggish period. Previous papers did not show any specific model and concluded that the capital requirement ratio would be better if it was adjusted based on stock prices or growth rate, or other economic indicators.
(ii) The Basel minimum capital requirement rule should be different for each country, since the economic structure and the behavior of banks are different from country to country.
(iii) The minimum capital requirement ratio applied to cross-border banking activities should be that of the country in which such bank lending activities take place rather than the origin of the source of fund. Empirical estimations are now underway. Some restricted cases of empirical results of Japan, the United States and Canada are reported in this paper.
Key words：The Basel minimum capital requirement, procyclicality of capital adequacy ratio, optimal capital requirement
JEL Classification：G28, E44
DP2010-2
''Financial Institution, Asset Bubbles and Economic Performance''
Tomohiro Hirano, Research Fellow, Financial Research Center (FSA Institute)
Noriyuki Yanagawa, Associate Professor, Faculty of Economics, University of Tokyo
This paper explores the relation between the quality of financial institution and asset bubbles. In this paper, we will show that bubbles can improve the macro performance even if the quality of financial institution is very poor and the financial market does not work well. In this sense, the high quality of financial institution and bubbles are substitutes. We will explore, however, that they are not perfect substitutes. Bubbles may burst. If bubbles burst, the economic performance must go down if the quality of financial institution is low. Hence, we will show that not relaying on bubbles, but improving the quality of financial institution is important for long run macro performance.
Key words：Asset Bubbles, Financial Institution and burst of bubbles
JEL Classification：E44
DP2010-1
''Asset Bubbles, Endogenous Growth, and Financial Frictions''
Tomohiro Hirano, Research Fellow, Financial Research Center (FSA Institute)
Noriyuki Yanagawa, Associate Professor, Faculty of Economics, University of Tokyo
This paper analyzes the existence and the effects of bubbles in an endogenous growth model with financial frictions and heterogeneous investments. Bubbles are likely to emerge when the degree of pledge-ability is in the middle range. This suggests that improving the financial market might enhance the possibility of bubbles. We also find that when the degree of pledgeability is relatively low, bubbles boost long-run growth. When it is relatively high, bubbles lower growth. Moreover, we examine the effects of bubbles bursting, and show that the effects depend on the degree of pledgeability, i.e., the quality of the financial system.
Keywords：Asset Bubbles, Endogenous Growth, and Financial Frictions
JEL Classification：E44,O43
