A Benefit from the Modern Portfolio Theory for Japanese Pension Investment
There were two paradigm shifts in Japanese pension investment. One was the investment deregulation in 1997 and another was an introduction and development of the modern portfolio theory. Until late 1980s, the typical asset allocation in Japanese pension was heavily dependent on the fixed income securities, especially government bonds. However, after modern portfolio theory was introduced, as we show in this paper, asset allocation gradually changed to become more efficient. Thanks to those paradigm shifts, the Japanese pension fund earned more than four trillion yen (40 billion dollars). In this paper, we examined the efficiency of the market model from late 1980s through early 2000s in Japanese equity market. According to our result, the market model is statistically significant to explain the excess return on individual equities. However the book-to-market ratio (B/M) and earnings-to-price ratio (EP) do not show stable signs on estimated correlation coefficients. After the stock market bubble collapsed, the book-to-market ratio has been no longer a useful indicator for value investment, a result consistent with Bloch et al. (1993) and Guerard (2006). The Japanese accounting standard employed legacy value basis, which did not reflect the hidden loss on the cross-shareholding stocks. Therefore the book value changed inelastic rather than the market price and the B/M ratio lost its power to make extra return on the value stocks.
KeywordsRisk Premium Pension Fund Market Model Excess Return Earning Forecast
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