ASSET PRICING IN JAPAN

Using postwar Japanese asset market data, this communication demonstra tes how well three different types of stochastic discount factors perf orm in accounting for the predictable components of financial returns or their serial correlations. When the three are compared, the prefere nce with subsistence expenditure works best to describe stock markets. This result is in contrast to some existing findings that risk-neutra l or near-risk-neutral behavior is a proper characterization of Japane se stock markets. On the other hand, none of the three specifications succeeds in describing land or money markets. The inability to explain these three markets consistently is a principal source of the failure of empirical tests which are based on the unconditional moment condit ions imposed by the CCAPM. (C) 1998 Academic Press.