What Determines CDS Prices? Evidence from the Estimation of Protection Demand and Supply*
Daisuke Miyakawa(Weatherhead Center for International Affairs, Harvard University)
Shuji Watanabe(College of Economics, Nihon University)

This paper examines the determinants of credit default swap (CDS) premiums by applying a limited dependent variable simultaneous equation system to a unique set of time series data for the Japanese credit market. The estimation results indicate that CDS premiums decrease as a result of an increase in the supply of protection due, for example, to fewer opportunities for investment in other assets (e.g., loans). We also find that premiums increase when the demand for protection increases due, for example, to larger short-cover needs. Further, the quantitative impact of factors accounting for the supply and demand of protection is likely to be misestimated unless the simultaneous determination of supply and demand is taken into account. This indicates that it is necessary to include demand and supply factors to understand fluctuations in CDS premiums.

*We would like to thank the Issue Editor, Sheridan Titman, Hong Yan (the discussant and referee), Tatsuyoshi Okimoto (Hitotsubashi University), Takayoshi Kitaoka (Meiji University), Kentaro Akashi (Gakushuin University), Hiroaki Yamauchi (MTEC), Masazumi Hattori (Bank of Japan), Toyoichiro Shirota (Bank of Japan), Robert Dekle (University of Southern California), Kaoru Hosono (Gakushuin University), Arito Ono (Mizuho Research Institute), Hirofumi Uchida (Kobe University), Iichiro Uesugi (Hitotsubashi University), Wako Watanabe (Keio University), and seminar participants at the Research Institute of Capital Formation, the Development Bank of Japan (RICF-DBJ), the Japan Society of Monetary Economics 2012 spring meeting, the Nippon Finance Association 2012 annual meeting, the Bank of Japan Institute of Monetary and Economic Studies Seminar, the Research Institute of Economy, Trade and Industry (RIETI), and International Review of Finance Conference on Japanese Financial Markets in Tokyo for helpful suggestion. S. Watanabe gratefully acknowledges financial support from Grant-in-Aid for Scientific Research no. 25380408, JSPS.

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Is No News Good News?: The Streaming News Effect on Investor Behavior Surrounding Analyst Stock Revision Announcement*
Takahiro Azuma(Japan Science and Technology Agency ERATO Minato Discrete Structure Manipulation Project)
Katsuhiko Okada(Kwansei Gakuin University Institute of Business and Accounting)
Yukinobu Hamuro(Kwansei Gakuin University Institute of Business and Accounting)

We investigate media influence on stock returns that are revised by sell-side analysts. Our main findings are twofold. First, post-announcement returns depend on whether the stock is covered by the media. Media-covered stocks demonstrate weaker post-announcement returns than their non-media-covered counterparts. Second, for media-covered event samples, we create a sentiment proxy using a unique news word count method and investigate whether pre-event sentiment affects post-event returns. Our results indicate that pre-event sentiment dictates short-run investor behavior and affects the post-announcement return in a significant manner.

*The authors would like to thank the Issue Editor, Sheridan Titman, Sara Ferreira Filipe (the discussant and referee), and participants at the International Review of Finance Conference on Japanese Financial Markets in Tokyo, for helpful suggestions. The authors are also thankful for the financial support by the Grant in Aid in Scientific Research (KAKENHI) and JST-ERATO Minato Discrete Structure Manipulation System Project.

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The Beta Anomaly in the Japanese Equity Market and Investor Behavior*
Seiichiro Iwasawa(Division of Business Administration, The NUCB Graduate School)
Tomonori Uchiyama(Quantitative Research Department, Nomura Securities)

It is well known that high-beta stocks are associated with a low alpha relative to the capital asset pricing model and to the Fama–French three-factor model. We show that the beta anomaly in the Japanese market is attributable to foreign institutional investors, not domestic individuals. Foreigners overweight high-beta stocks; the anomaly weakens or reverses when their investment increases and strengthens when it decreases; and they invest more in high-beta than low-beta stocks when increasing investment and sell high-beta more than low-beta stocks when reducing it. We do not find analogous results for individual investors. Our results suggest that the beta anomaly reflects a preference for high-beta securities by institutional investors aiming to beat a benchmark.

*We thank the Issue Editor, Sheridan Titman, Chu Zhang (discussant and referee), Sudipto Dasgupta (the editor) and other participants at the International Review of Finance Conference on Japanese Financial Markets in Tokyo and the 2013 Nippon Finance Association Conference for their helpful comments. Iwasawa acknowledges financial support from Japan Society of Promotion of Science (JSPS KAKENHI Grant Number 25380412).

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Long-run Effects of Minimum Trading Unit Reductions on Stock Prices*
Naoto Isaka(Sophia University)

We examine empirically the long-run effects of reductions in minimum trading units (MTU) on stock prices in Japan from October 2001 to May 2008. When firms reduce their MTU, the number of individual shareholders tends to increase significantly for several years. We estimate buy-and-hold abnormal returns and find that positive stock returns are observed not only for the period between the announcement day and the actual date of MTU decreases, but also for a period of several years following MTU reductions. In addition, we measure stock price reactions to the release of public information before and after MTU reductions and find that stock prices react less to the release of positive information and more to the release of negative information after the MTU reductions. These findings, together with evidence of the change in the short and long positions of investors after the MTU reductions, indicate that individual investors face short-sales constraints.

*The author would like to thank the Issue Editor, Sheridan Titman, Matthias Hanauer (discussant), Sudipto Dasgupta, Wataru Ohta, Seiichiro Iwasawa, Kentaro Iwatsubo, Stephen Sears, Tosio Serita, Ken-ichi Tatsumi, Masahiro Watanabe, Kuo-Chiang Wei, participants at the IRF conference on Japanese Financial Markets: Corporate Finance, Institutions, and Investments, the 2013 Conference of the Southwestern Finance Association and the 2013 meeting of the Nippon Finance Association, and seminar participants at Osaka University. The authors would also like to acknowledge the financial assistance of a Grant-in-Aid for Scientists (B) (No. 20730221) from the Ministry of Education, Culture, Sports, Science and Technology, Japan.

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Another Determinant of Household Leverage: Evidence from Japan’s Mortgage Loan Data*
Mamoru Nagano(Faculty of Economics, Seikei University, Tokyo, Japan)
Dong-Ho Yeom(Institute of Comparative Economic Studies, Hosei University)

We investigate determinants of household leverage in Japan, which did not experience the sharp rise in real estate prices and dramatic securitized mortgage market developments in the 2000s, and prove that these determinants are not universal. We employ household sample data collected during 2001–2010 by the Japan Housing Finance Agency and the Nikkei NEEDs Radar Financial Survey, totaling to 28,561 samples. We find that the degree of household interest rate risk preference, which proxies the household constitutional and behavioral factors including risk tolerance, positively relates to the household debt to income ratio. Further, as regards residential mortgage loans, these interest rate risk-preferring households buy higher-priced houses relative to their income, hold fewer financial assets, and tend to be headed by young males. We also find similarities between household mortgage debt determinants in Japan and the United States: the degree of regional bank market competition and the state of bank management soundness influence the aggressiveness of the residential mortgage loan business.

*An earlier version of this paper has been presented at several conferences, including the International Review of Finance and the Nippon Finance Association Conference, Japanese Financial Markets: Corporate Finance, Institutions, and Investments. We thank Jay Hartzell, Sheridan Titman, Sudipto Dasgupta, Takao Kobayashi, and the conference participants for valuable suggestions. This research is financially supported by KAKENHI, Grant-in-Aid for Scientific Research (C) 24530357.

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Is Japan Different? Evidence on Momentum and Market Dynamics*
Matthias Hanauer(Department of Financial Management and Capital Markets, Technische Universit?t )

Recent evidence for the US indicates that momentum profits are conditional on market dynamics. This paper documents that the following finding holds for the Japanese market as well: momentum returns are significantly higher when the market stays in the same condition than when it transitions to the other state. This evidence is consistent with the behavioral model of Daniel et al. (1998, Journal of Finance 53(6), 1839–1885.). Furthermore, market transitions occurred more frequently in Japan compared to the US. These results explain why average momentum returns have historically been low in Japan, a fact generally referred to as an empirical failure of momentum. Overall, my findings indicate that different market dynamics, and not different momentum, cause the overall low momentum returns in Japan.

*I appreciate helpful comments and suggestions from the Issue Editor, Sheridan Titman, K.C. John Wei (discussant and referee), Sudipto Dasgupta, Maximilian Groß, Christoph Jäckel, Christoph Kaserer, Daniel Kent, Soohun Kim, Maximilian Overkott, Akiko Watanabe, Masahiro Watanabe, and seminar participants at the IRF Conference on Japanese Financial Markets in Tokyo and the 21st Annual Conference on Pacific Basin Finance, Economics, Accounting, and Management in Melbourne. The author gratefully acknowledges the support of the TUM Graduate School’s Faculty Graduate Center TUM School of Management at the Technische Universität München.

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