| Budget Amount *help |
¥2,900,000 (Direct Cost: ¥2,900,000)
Fiscal Year 2005: ¥800,000 (Direct Cost: ¥800,000)
Fiscal Year 2004: ¥900,000 (Direct Cost: ¥900,000)
Fiscal Year 2003: ¥1,200,000 (Direct Cost: ¥1,200,000)
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| Research Abstract |
The results achieved during this research program derive from four interrelated projects, which examine important issues related to the realignment towards interest rate parity, the herding behavior in the banking sector, and stock market volatility in its relationship with foreign exchange fluctuations and with implied volatility from options markets. The aggregate results shed light on international financial markets and institutions. From the perspective of economic integration, there is evidence of nonlinearities in the behavior of Asian real interest differentials in the sense that large shocks to real interest parity are more likely to lead to faster readjustments than smaller shocks (Holmes and Maghrebi, IREF, 2004). The results also provide evidence of asymmetric monetary-policy, which suggests that for many countries, linkages with respect to the U.S. are likely to be less prevalent in a regime of rising nominal interest rates and falling inflation (Holmes and Maghrebi, JIFMIM
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, forthcoming). Based on a new approach for assessing the degree of economic and financial integration between G7 countries, there is also evidence of stronger integration between the US and Canada and much weaker integration with Japan. There is no clear evidence of structural breakdown in conditional correlation associated with significant events such as the ERM crisis or the introduction of the Euro (Holmes and Maghrebi, EREF, 2005). From the perspective of behavioral finance, the results suggest the existence of herding behavior in the Japanese loan market with evidence of causality from city banks to regional banks, from long-term credit banks and trust banks to city banks. The evidence from a panel data of Japanese banks suggests the existence of a cyclical pattern of herding. The signs of irrational herding observed only in association with the financial bubble, suggest that the irrational bank behavior was contributive to the bad loan problems in the late 1980s (Nakagawa and Uchida, WP 2003 & Uchida and Nakagawa, WP 2005). As far as the relationship between financial markets is concerned, there is new evidence from dynamic covariance modelling that market volatility tends to be ceteris paribus, more responsive to bad news about equity than good news and to currency depreciation than appreciations. The results indicate that appreciations are conducive to lower volatility in currency markets than depreciation. Also, the association of bad news with currency depreciation is likely to increase the level of volatility in currency markets and affect the extent of leverage effects in equity markets. These empirical results may partly explain the aversion of Asian countries toward beggar-thy-neighbor policies of exchange rate (Maghrebi, Holmes and Pentecost RPBFMP, forthcoming). Finally, another, achievement of this research program is the development of a new benchmark of expected volatility in the Japanese stock market in order to aggregate anticipation of future volatility across options prices. The Nikkei 225 implied volatility is not available in financial databases and it is constructed following the methodology underlying the new VIX index disseminated by Chicago Board of Options Exchange. There is evidence that despite its upward bias, implied volatility is more reflective of changes in realized volatility than alternative GARCH models, which account for volatility persistence and the asymmetric impact of news. Given the higher out-of sample performance of implied volatility the evidence lend support to the rationale behind drawing inference about future stock market volatility from option prices and to the usefulness of the new implied volatility index (Nishina, Maghrebi and Kim, DP 2006). Less
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