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 2020)

No. Title/Author(s)
(December 2020)
ESG/Green Investment and Allocation of Portfolio Assets
YOSHINO Naoyuki, YUYAMA Tomonori
Abstract | Full text (PDF:1.66MB)
(November 2020)
Analysis of High Frequency Trading (HFT) by an Algorithm Criterion
OHYAMA Atsuyuki, TSUDA Hiroshi
Abstract | Full text (PDF:14.3MB)(Full text is available only in Japanese.)
(October 2020)
Study on the Performance of Corporate Pension Plans: Some Thoughts on Stewardship Behavior
ISHIDA Hidekazu

Abstract | Full text (PDF:1.92MB)(Full text is available only in Japanese.)



ESG/Green Investment and Allocation of Portfolio Assets

YOSHINO Naoyuki, Director, Financial Research Center (FSA Institute)
YUYAMA Tomonori, Director, Macroeconomic and Market Analysis Office, Strategy Development and Management Bureau, FSA

The article examines the current portfolio allocation in ESG and Green projects. Traditional investments focus on rates of return and risks associated with investment. Environmental, Social and Governance (ESG) or Green factors are additional components that investors have to pay attention to. Environmental protection is very important. However, as we see the current different definitions of ESG or Green factors lead to distorted allocations in portfolio investments. In order to bring portfolio allocations to a desirable direction, global taxation on pollution or creation of an accurate Green credit rating based on emissions of various pollutants are recommended.

Keywords: ESG (Environmental, Society and Governance); Green investment, Green credit rating; optimal portfolio allocation; and GHG taxation.


Analysis of High Frequency Trading (HFT) by an Algorithm Criterion

OHYAMA Atsuyuki, Research Fellow, Financial Research Center (FSA Institute)
TSUDA Hiroshi, Professor, Faculty of Science and Engineering Department of Mathematical Sciences, Doshisha University

To grasp the situation of high frequency trading (HFT) in Japan, this paper proposes a new criterion for HFT that meets the definition of high speed trading in the Financial Instruments and Exchange Act, namely an “algorithm criterion” determined based on “trade automation” and “proprietary use of virtual servers,” and examines data on trading at the Tokyo Stock Exchange (TSE) for the period between January 2010 and September 2015 for (i) all listed stocks and (ii) an individual stock.  Specifically, for (i) trade data of all listed stocks at the TSE, quotation and trade displays of all stocks are reproduced with data on 33 items for all listed stocks with all buy and sell orders for 1405 business days.  For (ii) trade data of an individual stock, quotation and trade displays for the stocks of Toyota Mortar Corporation Inc. are reproduced with data on 33 items for the stock with all buy and sell orders for 69 business days (end-month business days).  We draw following conclusions from the two analysis.
From the results of the analysis for (i) all listed stocks, we confirm a group of HFT institutions that conduct standard HFT (high frequency and high speed orders) based on the new criterion for HFT that we proposed, and notably during 2014-2015 in the observation period, these HFT institutions own approximately 65 percent of all virtual servers, and account for approximately 70 percent of all trade orders, and approximately 45 percent of trading values.  Further, HFT institutions trade throughout the TSE’s trading hours, and while they trade in a wide range of issues they do not make margin transactions.  HFT institutions prefer cancelation orders and general investors tend to prefer alteration orders.  Those that make immediate-or-cancel (IOC) orders are limited to a group of HFT institutions with high-level algorithm capacity, and amongst HFT institutions those with both high algorithm capacity and high frequency capacity take advantage of short selling, and perform market making activities (more market-make orders and less take-orders) regardless of market situations.
As for the analysis of individual stocks (Toyota Mortar Inc.), we find that, while HFT institutions provide liquidity notwithstanding market situations, they tend to put orders thinly around best bids offers (BBOs), and this tendency strengthens in the price ranges where a tick (a minimum change in price) for stock prices is small.  During the observation period in 2014-2015, given that almost 30 percent of BBOs are made only by HTF institutions, BBO spreads can widen in 30 percent of quotation and trade displays if HFT institutions do not trade in the stock market.  Further, our study on trading behavior in the downward and upward price movements reveals that, in all kinds of market situations, active engagement of HFT institutions to lower stock prices is not observed, and rather trading activity of general investors has more influence on stock prices.

Keywords: high speed trading (HST); high frequency trading (HFT); virtual servers; algorithm trading; manual processing of orders; market orders; market-making orders; market-taking orders; immediate-or-cancel (IOC) orders; liquidity; quotation and trade displays; best bid offer (BBO); depth in quotation boards; and offer tick.


Study on the Performance of Corporate Pension Plans: Some Thoughts on Stewardship Behavior

ISHIDA Hidekazu, Special Research Fellow, Financial Research Center (FSA Institute)

This paper firstly takes up four de facto observations about Japan’s corporate pension plans, identifying inconsistency in corporate behavior relating to pension investment through the framework of functional and structural finance (FSF) and brings up the issue that Japan’s limited disclosure system is one of the reasons why investment capability of asset owners is constrained. Secondly, to demonstrate the relationship between the disclosure practices and investment behavior, this paper introduces a ‘stewardship-game’ model based on game theory, in which asset owners and investment management companies mutually interact, and indicates that the limited disclosure practice might be encouraging risk-averse investment behavior in multi-tiered investment decision/operational structures. This behavioral tendency ubiquitously observed among corporate pensions in Japan becomes firmly fixed when a recognition that “lowering target return of pension investment does not necessarily induce an accusation” prevails and is taken for granted. Thirdly, the paper reviews preceding studies, focusing on empirical studies that looked at funded status and unrecognized actuarial difference under the limited disclosure practice, and formulates hypotheses about relationships between portfolio returns and corporate values by classifying the funded status into two components, i.e., portfolio returns and the size of retirement benefit obligations using ranking-order data prepared by the author regarding expected portfolio returns of corporate pensions. This paper demonstrates that, if we focus on the period when risk/return profiles of capital markets function well, enhancing pension portfolio return can contribute to improving the funded status and corporate value itself as opposed to the view mentioned above, i.e., risk-averse behavior is not necessarily an optimal action. If a ranking of corporate pension returns is disclosed to public, it is expected to work as a catalyst such that firms and investment management companies would adjust their investment behavior corresponding to the feedbacks from the market.

Keywords: Basel; corporate pension plans; retirement benefit accounting system; retirement benefits trust; the Stewardship Code; and functional and structural finance (FSF).

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