Common Risk Factors and the Macroeconomy: New Evidence from the Japanese Stock Market

Lucas Bretschger and Filippo Lechthaler

No 12/160, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: Using new data on returns and risk factors the paper considers the stock performance on the Japanese market, which is the second largest in the world and operates under unique macroeconomic conditions. We find that the CAPM model is not an adequate approach for the Japanese market. The Carhart model performs reasonably well but fails to reject the null hypothesis of a zero intercept for the full period. Extended tests reveal a structural change in asset prices in the year 1998. When separating the sample into two periods, the standard four factor model explains market returns much better. We show that the relation between stock returns and risk factors is affected by macroeconomic conditions, especially when considering the momentum strategy. The Japanese case illustrates the necessity of considering structural instability related to the macroeconomic development, which is especially important for countries and time periods with a sluggish economy.

Keywords: Risk factors; value; size; momentum; Japanese stocks; macroeconomic conditions; structural break (search for similar items in EconPapers)
JEL-codes: C89 G01 G12 G15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2012-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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