A Time-varying Risk Analysis of Equity and Real Estate Markets in the U.S. and Japan

Previous studies have found that the return behavior on Japanese assets is consistent with the existing evidence on U.S. stocks in general. The current study offers new insights which suggest that Japanese equity and real estate markets might not necessarily behave in a parallel manner to U.S. capital markets. These insights are obtained from an examination of the nature of expected and unexpected movements in the returns of Japanese assets and U.S. assets, using a present value model which allows for a time-varying expected discount rate in conjunction with a Vector Autoregressive (VAR) process. One distinct difference is that changes in the future expected return for Japanese real estate and stocks are less persistent over time than their U.S. counterparts, even though returns on Japanese real estate (stock) is relatively more predictable than (similar to) returns on U.S. stocks and real estate. A further difference in U.S.–Japan returns is that there is no sign of negative serial correlation (or mean reversion) for returns on Japanese real estate within a 7-year horizon. Returns on Japanese stocks also exhibit a weaker mean reversion process relative to returns on U.S. stocks and U.S. real estate.