Risk taking by Japanese bond investors: Testing the “reach for yields” hypothesis in the Japanese bond markets

This paper attempts to test the “reach for yields” hypothesis in the Japanese bond markets to explore the cause of extremely low credit spreads on Japanese bonds, especially BBB-rated bonds, using a three-factor CAPM (γ-CAPM) with (co)skewness as an additional market risk factor. Under the γ-CAPM, risk premium can be expressed as a weighted average of β-risk and γ-risk. Empirical results support the γ-CAPM against the β-CAPM. The estimated weight of γ-risk is 2.6 percent in Japan, compared with 12.5 percent in the United States. This difference mainly reflects a lower degree of relative risk aversion in Japan.