Evaluation of the Japanese Stock Exchange - Essay Example

?Evaluation of the Japanese stock exchange Introduction For the past few decades beginning from the 1950s, scholars and academicians from all over the world have carried out empirical studies aimed at testing the market efficiency and the random walk problems in various equity markets all over the world. In their endeavour, these researchers and academicians have used various methods and techniques to test the market efficiencies and have therefore come up with different results. It is however important to note that these tests have been able to provide results that are generally similar. Most of these tests however have been carried out in the developed countries and have largely ignored the developing countries. This paper seeks to discuss the levels of market efficiency in the Japanese equity markets in order to determine whether they are successful or not. This will be done by evaluating several empirical studies carried out in the same. Market efficiency literature review Kono, Yatrakis & Segal (2011) carried out a study on the Japanese stock market efficiency. The authors sought to compare the performance of a stock portfolio that consisted of exchange-traded funds (ETFs) against the performance of the overall stock market which was represented by the Topix Index. This was carried out using data that was available from the 30 June 2008 to 30 June 2009. In their study, they constructed the exchange traded funds according to the Modern portfolio theory that was developed in 1952 by Harry Markowitz. The study was based on the null hypothesis that “A portfolio composed of Japanese ETFs and constructed according to the MPT provides a higher return per unit of risk than the Topix Index”. In order to arrive at the optimal portfolio of ETFs, the authors used the statistical data related to the ETFs, the mean variance optimisation model of the MPT and the risk free rates as well as the expected market return. In order to help in determining the optimal portfolio, they also used a software program that was designed for the same purpose. The optimal portfolio that they used comprised of 7 ETFs which complied with the selection criteria for the study in terms of maturity and criteria. The statistical results obtained from the data analysis were used to calculate the return per unit of risk of each of the ETFs (Kono et al., 2007). The results of the study showed that the ETF portfolio that was used in the study performed better in terms of the ratio of performance to risk as compared to the overall equity market. This means that the portfolio of ETFs had a lower negative return per risk unit than the entire Japanese equity market. The study therefore concluded that it is possible for an optimal portfolio of ETFs to perform better than the whole equity market index if the performance of the portfolio and the market is measured using the return per unit of risk which is also referred to as the Sharpe ratio by players in the stock market. The authors suggested that further research in the Japanese stock market should be carried out to test the relationship between the cash flows of the company and their performance in the stock market (Kono et al., 2011). Andersen, Bollerslev & Cai (2000) carried out a study on the “Intraday and interday volatility in the Japanese”. The study investigated the volatility of performance in the Japanese stock market. The study used a 4 year sample of 5-min Nikkei 225 returns for the period from 1994 to 1997. Testing the intraday volatility resulted in the observation that they behaved in a doubly U shaped pattern which was explained to be as a result of the opening and closing of the morning and afternoon trading sessions of the Tokyo Stock Exchange. The authors explain that the observed feature of the doubly U shaped pattern is consistent with other market theories that have advanced the importance of private and asymmetric information when determining the prices of stocks. It was also found that announcements about the macro economic conditions of the Japanese market do not have a very significant impact on the performance of the stock exchange market. Investigating the market efficiency of an individual market is important as it helps scholars and players in the market to understand the behaviours of that particular market in order to be able to operate well in the market and benefit from the market activity. Such a study is normally important when the investors focus on the market only in order to get market information. It is however important to note that the increasing levels of trade integration as a result of globalisation has led to reduced regulatory frameworks that govern the international movement of capital. This has consequently led to a situation where investors are increasingly motivated to look for international markets which may offer better performance and returns for their investments. This is supported by the study carried out by Tai (2001) which suggested that investors are more interested in looking for time varying risk premia in different markets and therefore they tend to seek information about various international markets. Conclusions Based on the performance of the given stocks of Metcash Limited, Woolworths Limited and Wesfarmers Limited, it is evident that the Japanese stock market is an efficient market due to the good performance of stocks that trade in the stock market. The Tokyo Stock Exchange is ranked as one of the top stock exchanges in the world owing to the fact that the stocks that are listed in the stock exchange tend to perform much better than stocks in other stock exchanges. It is also evident that the three companies in the discussion have an increasing trend in terms of the market capitalisation and the price of their shares as time moves. It is also important to note that the shares on issue of the three stocks have been on an increasing trend. This signifies that both the companies and the investors portray a lot of confidence in the future performance of their stocks in the stock market in terms of price movements. This therefore means that compared to other stock exchanges, the Japanese stock exchange is a well performing stock exchange and is very efficient. This market can only be compared to the New York Stock exchange and the London stock exchange. This is therefore a clear indication that the market operates with a high level of efficiency and therefore investors have a higher chance of benefiting from trading in the stock exchange. It is however important to note that in the stock market, it is not possible to predict returns as this normally signifies lack of efficiency in the market (Masih & Masih, 1999). References Andersen, T.G., Bollerslev, T. & Cai, J (2000), Intraday and interday volatility in the Japanese stock market, Journal of International Financial Markets Institutions and Money, 10, 107–130 Kono, P. M., Yatrakis, P. G., Segal, S. (2011), An Empirical Study Of Japanese Market Efficiency: Comparing The Risk-Adjusted Performance Of An ETF Portfolio Versus The Topix Index, Global Journal of Management and Business Research, 11(5), 49-54 Kono, P. M., Yatrakis, P. G., Simon, H. K., Segal, S. (2007), Comparing Risk-Adjusted Performance of ETF Portfolios vs. S&P 500 index. Financial Decisions, 2, 45-56 Masih, A.M.M. & Masih, R. (1999), Are Asian stock market fluctuations due mainly to intra-regional contagion effects? Evidence based on Asian emerging stock markets, Pacific-Basin Finance Journal, 7, 251-282. Tai, C.S. (2007), Market integration and contagion: Evidence from Asian emerging stock and foreign exchange markets, Emerging Markets Review, 8, 264-283. Read More