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I would like to thank J. R. Rosales, Tim Callen, Jingquing Chai, Burkhard Drees, Ken Kang, Toshiyuki Miyoshi, Kazunari Ohashi, and Toshitaka Sekine for useful comments on an earlier version. However, all errors are mine. The views presented here are mine and do not necessarily reflect those of the IMF or its policies. This paper will be published, in somewhat different form, in International Finance Review.
Lo (1991) summarizes the difficulty in measuring market efficiency and proposes that ideally one should test it in the context of an equilibrium model that defines normal asset returns. The other implication of this EMH is that equity prices in less developed markets would be expected to exhibit a long memory because of the shallowness of their markets with less mature institutional and regulatory settings.
Crato and de Lima (1994) use FIGARCH and underline the persistence in the conditional variance of US stock data, such as the NYSE and S&P500, from 1966–1991.
Hirata (1999) argues that the unique characteristics of institutions and regulations have affected the capital structure of Japanese firms.
See Hall (1998) for a summary of the deregulation and liberalization of the Japanese financial market. This slow process is in stark contrast to the urgent need for reform. Along with external pressure to internationalize the Japanese market, there was a demand for financial market reform in Japan. The first oil shock forced domestic corporations to curtail investment and change their financing methods from bank loans to an increased reliance on capital markets. Similarly, high inflation caused by the oil shock motivated households to seek non-traditional assets with higher returns.
Some progress was also made in the 1980s. For example, prior to December 1985, securities affiliates of foreign banks were not allowed to open branches in Japan because Article 65 of the Securities and Exchange Law separated the banking and securities business. Furthermore, the Tokyo Stock Exchange (TSE) decided in 1985 to allow foreign securities companies to obtain membership, for the first time since its establishment in 1878.
The Big Bang was targeted to cover all financial institutions in contrast to the British Big-Bang that was confined to securities-related reforms. The Financial Supervisory Agency, which is responsible for the inspection and supervision of financial institutions and surveillance of security transactions, was established in June 1998. In July 2000, the agency was reorganized and renamed as the Financial Services Agency under the Financial Reconstruction Commission.
Mandelbrot (1977) calls the process with d < 0 as short memory or anti-persistent. However, since both the processes with -0.5 < d < 0 and 0 < d < 0.5 exhibit a slower convergence than the stationary ARMA case, we call these series long-range persistent. The use of this terminology is consistent with Campbell, Lo, and MacKinlay (1997).
The overall conclusion reported in this section is still valid even when other major index data (JASDAQ and TOPIX) are used.
The TSE domestic market is divided into two sections. Briefly, the first section is the market for stocks of larger companies, and the second is for those of smaller and newly listed companies with lower trading volume levels. TSE stocks are reviewed every year as regards whether they meet the criteria for the first or second sections. About 1,500 companies are listed in the first section, and more than 500 companies in the second one.
Baillie (1996) summarizes the poor performance of unit root tests in the presence of long-range dependence in data.
Detailed information related to the PKO has never been disclosed by the government, but the PKO frequently took place around March because many banks calculate the losses or gains from their equity holdings using March stock price data.
Our analysis is based on (1, d, 1) in order to use the positivity conditions attached to the FIGARCH term (see Section III.B).