Abstract
This paper studies the predictability of the Japanese equity market, focusing on the forecasting power of nonparametric volatility and tail risk measures obtained from options data on the S&P 500 and Nikkei 225 market indices. The Japanese market is notoriously difficult to forecast using standard predictive indicators. We confirm that country-specific regressions for Japan – contrary to existing evidence for other national equity indices – produce insignificant predictability patterns. However, we also find that the U.S. option-implied tail risk measure provides significant forecast power both for the dollar–yen exchange rate and the Japanese excess returns, especially when measured in U.S. dollars. Thus, the dollar-denominated Japanese returns are, in fact, predictable through the identical mechanism as for other equity market indices, suggesting a high degree of global integration for the Japanese financial market.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 344-363 |
| Number of pages | 20 |
| Journal | Journal of Econometrics |
| Volume | 222 |
| Issue number | 1 |
| DOIs | |
| State | Published - May 2021 |
Funding
This work is partially supported by National Science Foundation, United States of America grant SES-1530748 and JSPS, Japan KAKENHI grant JP15K03397, JP18K01690. In addition, Andersen gratefully acknowledges support from CREATES, Center for Research in Econometric Analysis of Time Series (DNRF78), funded by the Danish National Research Foundation, Denmark . We thank the Guest Editor, Zhengjun Zhang, and two anonymous referees for many suggestions that significantly improved the paper. We also thank participants at the 2nd International Conference on Econometrics and Statistics (EcoSta 2018) at City University of Hong Kong, June 2018, the University of San Diego Conference in celebration of Tim Bollerslev \u2019s 60\u2019th birthday, October 2018, and the Financial Management Association Conference on Derivatives and Volatility at the CBOE, Chicago, November 2018, for useful comments.
ASJC Scopus subject areas
- Economics and Econometrics