Anomalies, risk, and Japanese stock returns

Abstract

This paper presents some interesting characteristics of the Japanese stock market, which now stands as the third largest market in the world. Contrary to the popular findings in the U.S. and European markets, Japanese stocks display no short-term return continuation. We find reversals in Japanese stock returns for various holding-periods from one month to a year and for portfolios ranked on varying lengths of prior-period return performance, suggesting that past losers consistently outperform past winners. We also provide another striking result. In contrast to conventional wisdom, Japanese value stocks on average do not outperform glamour stocks. Our findings indicate that these stock return patterns cannot be rationalized using the Fama-French (1993) three-factor model. In contrast to the U.S. evidence, the three factors are not able to fully capture the common variation in Japanese portfolio returns. Using a non-nested, multivariate specification test, we show that the Fama-French three-factor model is consistently rejected in favor of Connor-Korajczyk's (1988) specification of arbitrage pricing theory.