Estimating Fair Premium Rates for Deposit Insurance Using Option Pricing Theory: An Empirical Study of Japanese Banks

This paper utilizes option pricing theory to analyze bank stock prices as one method of estimating fair variable deposit insurance premium rates in accordance with individual bank default risk, and conducts empirical analyses using Japanese data. The purpose of the analyses is to discuss the framework of public organsfdelegate monitoring of bank management. One of the functions of the deposit insurance system is such monitoring. The present system in the United States incorporates the subjective judgment of a bank supervisor combined with certain objective criteria for setting premium rates. There is a need to analyze the types of methodologies that might be viewed as options for adoption in Japan. To determine whether setting premium rates based on stock price information is a valid and stable approach, comparative analysis is conducted on the results of trial calculations utilizing this method versus other bank management indexes (credit ratings, etc.), and case analyses are carried out on failed banks. The conclusion is that while this method does involve a certain valuation error, it is an effective means of identifying banks with bad conditions. Moreover, the results confirm that by making adjustments for the changes in market expectations regarding the forbearance of the supervisory authorities, the accuracy of the estimates can be improved. Finally, this paper considers the impact on bank management that could be expected if this method were actually adopted.

Splitting off Rational Parts in Homotopy Types

It is known algebraically that any abelian group is a direct sum of a divisible group and a reduced group (See Theorem 21.3 of \cite{Fuchs:abelian-group}). In this paper, conditions to split off rational parts in homotopy types from a given space are studied in terms of a variant of Hurewicz map, say \bar{\rho} : [S_{\Q}^{n},X] \to H_n(X;\Z) and generalized Gottlieb groups. This yields decomposition theorems on rational homotopy types of Hopf spaces, $T$-spaces and Gottlieb spaces, which has been known in various situations, especially for spaces with finiteness conditions.Comment: 6 page

The Effects of the Bank of Japan's Zero Interest Rate Commitment and Quantitative Monetary Easing on the Yield Curve: A Macro-Finance Approach (subsequently published in "The Japanese Economic Review", September 2007, Vol. 58, No. 3, 303-328)

This paper provides an empirical investigation of monetary policy in Japan in the zero interest rate environment that has held sway since 1999. In particular, we focus on the effects of the zero interest rate commitment and of quantitative monetary easing on mediumto long-term interest rates in Japan. In the study we apply a version of the macro-finance approach, involving a combination of estimation of a structural macro-model and calibration of time-variant parameters to the yield curve observed in the market. This enables us to decompose interest rates into expectations and risk premium components and simultaneously to extract the market's perception of the Bank of Japan's (BOJ's) willingness to carry on its zero interest rate policy. In the analysis we make clear the counterfactual policy that would have been practiced in the absence of the actual policies followed by the BOJ since 1999. From this analysis, we tentatively conclude that the BOJ's monetary policy since 1999 has functioned mainly through the zero interest rate commitment, which has led to declines in medium- to long-term interest rates. We also find some evidence that, up until the end of 2003, raising the reserve target may have been perceived as a signal indicating the BOJ's accommodative policy stance although the size of the effect is not large. The portfolio rebalancing effect -- either by the BOJ's supplying ample liquidity or by its purchases of long-term government bonds -- has not been found to be significant.

Further Monetary Easing Policies under the Non-negativity Constraints of Nominal Interest Rates: Summary of the Discussion Based on Japan's Experience

This paper examines issues surrounding monetary policy under zero interest rates based on one and a half yearfs experience in Japan. After reviewing the market development in Japan, it summarizes the transmission mechanism of monetary policy under zero nominal interest rates, and considers what would be the likely policy options if a central bank were to conduct further monetary easing. Specifically, a more detailed policy announcement is regarded as feasible, less costly, and the less risky option, although additional effects of monetary easing through this measure are relatively limited. On the other hand, introduction of a temporary fixed exchange rate system and a huge increase in the outright purchase of medium- and long-term government bonds can induce relatively large effects, although the uncertainty in the effects as well as the accompanied costs and risks may be very large. In addition, the paper considers the validity of introducing inflation targeting. It summarizes that inflation targeting is not necessarily easy to distinguish from traditional policy management based on an overall consideration. Furthermore, given recent tendencies in Japan, the paper argues that the introduction of inflation targeting in the current situation might impair the conduct of monetary policy in the absence of preconditions for benefiting from its intrinsic merits.

A New Framework for Measuring the Credit Risk of a Portfolio: The "ExVaR" Model

This paper proposes a new framework for the quantitative evaluation of the credit risk of a portfolio by extending the concept of value at risk. In practice, the risk evaluation period is set individually for each transaction in the portfolio and a simulation is carried out on the movements of default probabilities, interest rates, and collateral asset prices as well as on the realization of defaults of counter parties. The result fixes the cash flow along the simulated path and leads to the present value of the total cash flows. By repeating this procedure many times, we obtain the probability distribution of the present value, by which we can evaluate the price and the risk of the portfolio. This framework enables us comprehensively and objectively to measure the risk taking into account the diversification/concentration effect, the collateral effect, and the correlation between credit risk factors and market risk factors. After presenting the methodology, the paper calculates the risk of hypothetical test portfolios. They are used to discuss the applicability of the framework to practical uses.

Prospects for Prudential Policy: Toward Achieving an Efficient and Stable Banking System

This paper examines how public intervention (prudential policy) in the banking area should be pursued and aims at providing points for discussion in considering what kind of system should be established to promote both the efficiency and stability of banking functions. The basic thrust of the paper is that it is effective to utilize market mechanisms to improve the efficiency of banking functions and that public intervention is justified in coping with various market failures if optimality is satisfied. Here, market failure is taken to mean (1) information asymmetry between banks and creditors (especially small-lot depositors) and (2) any negative externality that illiquidity and insolvency transmit in a networked way to other banks, leading to the likely emergence of various risks such as (a) small-lot depositors bearing losses, (b) the collapse of solvent banks due to a liquidity shortage, (c) the spreading by contagion of illiquidity of banks, and (d) the spreading by contagion of insolvency of banks. In examining public intervention to cope with these risks, we conclude that a deposit insurance system with a variable premium and prompt closure action are effective in dealing with risk (a), that the invocation of the central bank's lender of last resort function is effective for risks (b) and (c), and that the introduction of a charge system to internalize externality is effective for risk (d). Arguments in this paper are conceptual in that they are derived based on certain assumptions with respect to entities related to the banking system, and thus do not exhaustively cover all the factors necessary for deciding actual policies. We hope that our conceptual summary provides grounds for future discussions on more specific system design.

"The Effects of the Bank of Japan's Zero Interest Rate Commitment and Quantitative Monetary Easing on the Yield Curve: A Macro-Finance Approach"

This paper provides an empirical investigation of monetary policy in Japan in the zero interest rate environment that has held sway since 1999. In particular, we focus on the effects of the zero interest rate commitment and of quantitative monetary easing on mediumto long-term interest rates in Japan. In the study we apply a version of the macro-finance approach, involving a combination of estimation of a structural macro-model and calibration of time-variant parameters to the yield curve observed in the market. This enables us to decompose interest rates into expectations and risk premium components and simultaneously to extract the market's perception of the Bank of Japan's (BOJ's) willingness to carry on its zero interest rate policy. In the analysis we make clear the counterfactual policy that would have been practiced in the absence of the actual policies followed by the BOJ since 1999. From this analysis, we tentatively conclude that the BOJ's monetary policy since 1999 has functioned mainly through the zero interest rate commitment, which has led to declines in medium- to long-term interest rates. We also find some evidence that, up until the end of 2003, raising the reserve target may have been perceived as a signal indicating the BOJ's accommodative policy stance although the size of the effect is not large. The portfolio rebalancing effect -- either by the BOJ's supplying ample liquidity or by its purchases of long-term government bonds -- has not been found to be significant.

An Empirical Analysis of Equity Market Expectations in the Recent Financial Turmoil Using Implied Moments and Jump Diffusion Processes

This paper investigates market expectations of future equity prices using the probability distribution and the moments implied in equity option prices. We first conduct, without assuming a particular model, a nonparametric analysis of the development of market expectations in four major markets during the financial turmoil following the summer of 2007. We then conduct a parametric analysis to reconsider these expectations from the perspective of a stochastic process, assuming jump diffusion processes that configure the implied distribution. These analyses reveal that the possibility of discontinuous price jumps in each country increased downwards during the recent financial turmoil, while volatilities determining the dispersion of continuous price changes surged. Viewing the results from the perspective of a probability distribution, we find that kurtosis and the absolute value of skewness declined, while variance dramatically increased.implied distribution, implied moment, jump diffusion process, nonparametric method, GMM, characteristic function GMM

Correlation of structure and function in the oxidative phosphorylation system of submitochondrial particles

1. After the centrifugation of sonicated heavy beef heart mitochondria at 75, 000 &#215; g for 10 minutes, the supernatant was centrifuged at 144, 000 &#215; g for 30 minutes. The residue was revealed being composed of vesicular inner membrane fragments (ETPH), about 600 to 1000 &#197;. in diameter, showing a morphological homogeneity and a high capacity of oxidative phosphorylation. 2. The Pia ratio of the ETPH in the presence of succinate and of NADH2 was 1.68 and 2.54, respectively, and the corrected Pia value for O2 gas equilibrium was 1. 01 and 1.40, respectively. 3. The capacity of oxidative phosphorylation in ETPH fraction was parallel to the activity of the oligomycin. sensitive ATPase in these fractions. 4. The P/0 ratio of ETPH was decreased to about 50 % by hypotonic treatment. The decrease of P/0 ratio was restored to the level of about 90 % by incubating the ETPH with ATP and BSA. In the instance where the P/0 ratio was low level in the hypotonic medium, the surface structure of ETPH was observed as a swollen form and the head pieces of the elementary particles were clearly observed in contrast to the solid surface structure of ETPH in the isotonic medium. 5. The P/0 ratio of ETPH was decreased to about 60 % by relatively severe sonication, and after separating the residue from the supernatant, that of the residue decreased further to about 40 %. The P/0 ratio of the residue was restored to the level before the separation on the addition of the supernatant containing oligomycin-insensitive ATPase. 6. A discussion was made on the correlation between the surface structure and the activities at terminal phosphorylation step of ETPH after the simple physico-chemical treatment.</p

Ultrastructure and biochemical function of the mitochondria in respiratory-deficient mutant yeast induced by 4-nitroquinoline nitrogen oxide

1. A respiratory-deficient mutant strain of yeast was obtained from wild strain of Saccharomyces servisiae by treatment with 4-nitroquinoline N-oxide. Ultrastructure and function of the wild or mutant strains and the mitochondrial fractions isolated from these strains were examined by biochemical and electron microscopic analyses. 2. The frequency of the respiratory-deficient mutant strain in yeast induced with 10-6M 4-nitroquinoline N-oxide was about 40 %. 3. Respiratory-deficient mutant strain is incapable of reducing 2, 3, 5-triphenyltetrazolium chloride salt and to grow on lactate medium. In addition to this, the mutant has been found to have lost its ability to take up oxygen in sodium succinate and pyruvate. 4. 4.Nitroquinoline N-oxide in the concentration that induces a mutant of yeast cells or its kin inhibits the oxygen uptake in normal strain. 5. The normal strain of yeast is characterized by difference spectrum corresponding to cytochromes a+as, band c+Cll respectively, whereas, the mutant strain containes almost no cytochromes a+ as, band C1 but contains normal or increased amount of cytochrome c. 6. Mitochondrial fraction isolated from mutant strain has largely lost its ability to oxidize succinate. On the other hand, NADH-, lactate-and cytochrome c-oxidase activities are reduced by about 1/17, 1/7 and 1/8 of that of normal strain, respectively. 7. Succinate dehydrogenase activity of mutant strain is almost zero. Moreover, this activity is not affected on the addition of phenazine methosulfate. NADH dehydrogenase activity of mutant stran is about 1/2 of normal strain. 8. The variations in mitochondrial structure of normal and mutant strain in the stationary phase have been followed with the aid of electron microscopy. In contrast to the normal strain, the mutant strain revealed distinct morphological changes in mitochondria, especially, the lack of cristae in its interior. The results have been interpreted to indicate that the mutant induced by 4.nitroquinoline N.oxide has a character of cyto. plasmic mutant.</p