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 2012)

No.	Title/Author(s)
DP2012-6 (December 2012)	The Empirical Factor Analysis of Loss Given Default and Expected Loss by Linearized Multistage Model Akihiro Kawada Satoshi Yamashita Abstract | Full text (PDF:595KB) (Full text is available only in Japanese.)
DP2012-5 (December 2012)	The Effectiveness of the Uptick Rule and the Naked Short-Selling Ban: an Agent-Based Simulation Study Tomoko Ohi Abstract | Full text (PDF:560KB) (Full text is available only in Japanese.)
DP2012-4 (December 2012)	Possibility of the Diffusion of the Electronically Recorded Monetary Claims System among Asian Countries and Future Tasks Nobuhiko Sugiura Abstract | Full text (PDF:737KB) (Full text is available only in Japanese.)
DP2012-3 (May 2012)	Behavioral and Welfare Effects of Disclosure in Securities Market: A Survey Tomoya Nakamura Abstract | Full text (PDF:845KB) (Full text is available only in Japanese.)
DP2012-2 (April 2012)	The Impact on Housing Loans Caused by Stress on Family Budgets Keiichi Sato Abstract | Full text (PDF:2,695KB)
DP2012-1 (April 2012)	Income Taxation on Certificate Holders of Multi-Class Trusts Masao Yoshimura Abstract | Full text (PDF:428KB) (Full text is available only in Japanese.)

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Abstracts

DP2012-6
''The Empirical Factor Analysis of Loss Given Default and Expected Loss by Linearized Multistage Model''

Akihiro Kawada, Special Collaboration Research Students, Institute of Statistical Mathematics
Satoshi Yamashita, Special Research Fellow, Financial Research Center (FSA Institute)

LGD (the Loss Given Default) is an important element of credit risk estimation as the PD (the Probability of Default). Most of the studies about LGD provide theoretical model or market model without using actual bank loan LGD data. Because, the bank loan LGD data is highly-confidential information, it is not available to outside researchers.

This paper develops statistical models using the actual bank loans LGD data of Japanese banks. The aim is to identify factors of LGD, and to develop actual predictive models for LGD and EL (the Expected Loss). We find that the collateral ratio, guarantees ratio and loan size are significant factors for LGD. Compared to LGD assigned in FIRB (the foundation internal ratings based approach), the level of LGD in Japan is lower than it in other countries. We build some multi-stage statistical models for PD, LGD and EL. As results, we find that not only financial data but loan information such as collateral and guarantees have influence in PD and improve the predictive accuracy of EL.

Keywords : Credit risk, LGD (the loss given default), EL (the expected loss)

DP2012-5
''The Effectiveness of the Uptick Rule and the Naked Short-Selling Ban: an Agent-Based Simulation Study''

Tomoko Ohi, Research Fellow, Financial Research Center (FSA Institute)

We evaluate the effectiveness of the short selling constraints by employing an agent-based simulation to model investors’ behavior in the stock market.

We focus on two of the four regulatory measures on short- selling in Japan: "uptick rule requirement" and “naked short-selling ban.” We analyze the effectiveness of each measure by comparing the simulations for markets with and without the regulation.

Our simulation model consists of three kinds of market participants who have different investment styles, namely, fundamentalists, trend followers and noise traders. Demand for a stock is determined by orders from the three types of traders and a resulting price in simulation is calculated using Itayose method. The unique feature of our model is the stock lending and borrowing transactions between traders. The lending/borrowing fee is modeled to influence the investment decisions of the traders.

We calculate the price fluctuation, the divergence of the price from the fundamental value and the price volatility for each simulated market. We evaluate robustness of the markets by giving two exogenous shocks to the markets: a drastic decline in the fundamental price and an extremely low price in the sell limit order. As a result, we find that the regulatory measures make the market more stable and robust against such abrupt shocks. On the other hand, market tends to be overvalued by the introduction of those regulatory measures.

Keywords : short selling regulation, naked short selling, uptick rule, agent-based simulation

DP2012-4
''Possibility of the Diffusion of the Electronically Recorded Monetary Claims System among Asian Countries and Future Tasks''

Nobuhiko Sugiura, Special Research Fellow, Financial Research Center (FSA Institute)

According to “The Action Plan for New Growth Strategy – Blueprint for Revitalizing Japan”, published by the Financial Service Agency (FSA) in December 24, 2010, it states the FSA’s projects to tackle in the future as follows, “…the FSA will conduct a survey on the current status of financial and capital markets in Asian countries … thereby making these frameworks (including the cross-sectional user protection under the Financial Instruments and Exchange Act and the electronically recorded monetary claims system, etc.) widely available in Asia.”

As a part of those surveys, the FSA published “the Survey on Business-to-Business” in 2011 (former survey) in order to grasp the situation in relation to the introduction of the electronically recorded monetary claims system. The former survey reported basic information about the industrial structure, the financial system, local practices on business issues and problems on fund raising. Thereafter, responding to the results of field researches and the former survey, the FSA published the “Survey on the diffusion of a Japan-modeled electronically recorded monetary claims among Asian countries” in March 2012 (current survey). The current survey analyzed discrepancies between the former survey, which was based on literature research, and actual conditions including each countries’ government needs.

Responding to these surveys and also adding newly ascertained facts, this paper analyzes more concrete aspects of possibilities of the introduction of the electronically recorded monetary claim system, including analysis of cases that might affect the introduction of the system such as trade credits, conditions for introducing the system, and moreover, demand for the system by relevant institutions. The object of this paper is to investigate the possibility of the diffusion of a Japan-modeled electronically recorded monetary claim system overseas.

Keywords : Electronically recorded monetary claims, Asian bond markets, Export system

DP2012-3
''Behavioral and Welfare Effects of Disclosure in Securities Market: A Survey''

Tomoya Nakamura, Research Fellow, Financial Research Center (FSA Institute)

This paper introduces existing research on information transparency in securities markets. First, I explain a model of the Keynesian beauty contest game regarded as a reduced-form of securities markets and consider the problem of overreaction due to public information. Then I comment on studies of alleviation of the overreaction problem. This paper may provide some useful tips from of recent discussions on information disclosure.

Keywords : disclosure; public information; strategic complementarities; Keynesian beauty contest game

JEL classification : C72, D82, D83, E58

DP2012-2
''The Impact on Housing Loans Caused by Stress on Family Budgets''

Keiichi Sato, Special Research Fellow, Financial Research Center (FSA Institute)

This paper uses social surveys and statistical techniques to investigate methods for monitoring the risks on housing loans in Japan caused by family budgets.

With the income of households burdened with a mortgage continuing to decrease, and savings also on the decline, the only thing not decreasing is the amount of mortgage repayments. If anything, it is on a slight upward trend. Consequently, the mortgage repayment ratio is also continuing to rise. One of the concerns in terms of risks on housing loans in Japan is that the decline in income levels will cause the middle class, which had previously maintained steady repayments, to become disjointed, and there will be an impact on repayments.

Before we begin to investigate the effects that environmental changes, such as decreasing incomes and rising interest rates, have on housing loans, we must first gain an understanding of the circumstances of individual family budgets (income, spending, savings, etc.) and of the details of their housing loans (product attributes, amounts of repayment, etc.).

In this study, with data obtained by utilizing the National Survey of Family Income and Expenditure to correct estimates from an Internet survey, which simultaneously asks about family budgets and the product attributes of housing loans, I prepared three determination processes:

(1) Sustainability of repayment (check of the relationship between disposable income, consumption expenditure and the amount of monthly mortgage repayments);

(2) Adjustment of family budgets (attachment of a maximum consumption expenditure, set according to the regional division and the number of household members); and

(3) Dissaving (check of whether a repayment amount, which is still short even after adjusting the family budget, can partially be covered by dipping into savings),

and I conducted an impact analysis by altering the environment, such as income or the amount of mortgage repayments.

Keywords : Housing loans; family budgets; Internet survey; National Survey of Family Income and Expenditure

DP2012-1
''Income Taxation on Certificate Holders of Multi-Class Trusts''

Masao Yoshimura, Special Research Fellow, Financial Research Center (FSA Institute)

In 2007, Japan clarified tax treatment of trusts arranged under new Trust Act, however we cannot tell how to allocate tax attributions, such as revenues, capital gains and costs, among trust beneficiaries of multi-class trusts. Income Tax Act simply provides that trust beneficiaries shall be deemed to directly own trust assets and liabilities “in accordance with their claims” to the trustee for the purpose of tax law and tax authority issue no rulings or guidance on concrete calculation of beneficiaries' taxable income so far. This is one of the reasons for investors to hesitate to make use of a multi-class trust, which provides flexibility with them to combine and slice series of cash-flows and risks arising from trust assets based on their varied investor profiles.

This paper proposes a financial transaction model as a practical option to curtail tax uncertainty. Under this model we deem an “equity-holder beneficiary” of a multi-class trust as a holder of all assets and liabilities of the trust and other beneficiaries as holders of claims to the equity-holder beneficiary for tax purposes. In this paper I consider rationale and definition of an equity-holder beneficiary with reference to so-called pass-through debt certificates in the United States to enhance practicability of this approach. A practitioners' insight gives us implication focusing on concept of tax ownership, which distinguishes an ownership interest in trusts from non ownership interests. In conclusion, I suggest that you can find a scent of such distinction and a foundation to adopt in the financial transaction model in Japanese Income Tax Act.

Keywords : Trust, Tax, and Tax ownership