Banks' Stockholdings and the Correlation between Bonds and Stocks: A Portfolio Theoretic Approach

Yoshiyuki Fukuda, Kazutoshi Kan and Yoshihiko Sugihara
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Yoshiyuki Fukuda: Bank of Japan
Kazutoshi Kan: Bank of Japan
Yoshihiko Sugihara: Bank of Japan

No 13-E-6, Bank of Japan Working Paper Series from Bank of Japan

Abstract: In this paper, we analyze the optimal asset composition ratio of stocks and bonds for a bank taking into consideration the correlation between the interest rate risk and equity risk in the financial capital market using a portfolio model. The analysis reveals that in determining the asset composition ratio in Japan, the correlation coefficient between the interest rate and stock prices as well as the stock price volatility plays a more important role than the interest rate volatility. We also show that in the present circumstances, the stockholding ratios of most financial institutions in Japan are higher than the levels calculated from the model. It is suggested that when the market is exposed to severe stress such as a surge in stock price volatility or reversal of the correlation between the interest rate and stock prices, the stockholding ratios would be even more excessive than the levels obtained from the model.

Date: 2013-03-25
New Economics Papers: this item is included in nep-ban, nep-fmk and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:boj:bojwps:13-e-6

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