Risk taking by Japanese bond investors: Testing the "reach for yields" hypothesis in the Japanese bond markets

Shinichi Nishioka and Naohiko Baba

The Quarterly Review of Economics and Finance, 2008, vol. 48, issue 4, 691-707

Abstract: This paper attempts to test the "reach for yields" hypothesis in the Japanese bond markets to explore the cause of extremely low credit spreads on Japanese bonds, especially BBB-rated bonds, using a three-factor CAPM ([gamma]-CAPM) with (co)skewness as an additional market risk factor. Under the [gamma]-CAPM, risk premium can be expressed as a weighted average of [beta]-risk and [gamma]-risk. Empirical results support the [gamma]-CAPM against the [beta]-CAPM. The estimated weight of [gamma]-risk is 2.6 percent in Japan, compared with 12.5 percent in the United States. This difference mainly reflects a lower degree of relative risk aversion in Japan.

Keywords: CAPM; Reach; for; yields; Corporate; bonds; Skewness; Risk; aversion (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:48:y:2008:i:4:p:691-707

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