An Investigation of the ICAPM in Japan: Evidence from the Tokyo Stock Exchange with a Review of International and Accounting Research

Abstract

After the recent US and international related literature review, this paper explores the state variables that are priced in the Intertemporal Capital Asset Pricing Model (ICAPM) in Japan. Deriving the time-varying covariance risks by using the multivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model, we analyze the ICAPM in the Tokyo Stock Exchange. Our empirical examinations clarify that in Japan, the time-varying covariance between the first difference of the seasonally adjusted Consumer Price Index and market return and the time-varying covariance between the first difference of the trading volume divided by Japanese Gross Domestic Product and market return are priced in Merton’s ICAPM. Further, we discuss the prospect for asset pricing and accounting research by reviewing the recent combined studies.