Tail Risk and Return Predictability for the Japanese Equity Market, Journal of Econometrics
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. As documented in prior work, the Japanese market is notoriously difficult to forecast using standard predictive indicators. We conrm 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.
Torben Andersen, Viktor Todorov, Masato Ubukata
Andersen, Torben, Viktor Todorov, and Masato Ubukata. 2021. Tail Risk and Return Predictability for the Japanese Equity Market. Journal of Econometrics. 222(1, Part B): 344-363.