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Bank of Japan Working Paper Series

Banks' Stockholdings and the Correlation between Bonds and Stocks : A Portfolio Theoretic Approach
Yoshiyuki Fukuda* yoshiyuki.fukuda@boj.or.jp Kazutoshi Kan** kazutoshi.kan@boj.or.jp Yoshihiko Sugihara***

No.13-E-6 March 2013

Bank of Japan 2-1-1 Nihonbashi-Hongokucho, Chuo-ku, Tokyo 103-0021, Japan
* ** ***

International Department (ex-Financial System and Bank Examination Department) Financial System and Bank Examination Department Personnel and Corporate Affairs Department (ex-Financial System and Bank Examination Department)

Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of the Bank. If you have any comment or question on the working paper series, please contact each author. When making a copy or reproduction of the content for commercial purposes, please contact the Public Relations Department (post.prd8@boj.or.jp) at the Bank in advance to request permission. When making a copy or reproduction, the source, Bank of Japan Working Paper Series, should explicitly be credited. s BANKS’ STOCKHOLDINGS AND THE CORRELATION BETWEEN BONDS AND STOCKS:*
A PORTFOLIO THEORETIC APPROACH

Yoshiyuki Fukuda†, Kazutoshi Kan‡ and Yoshihiko Sugihara§

ABSTRACT
In this paper, we analyze the optimal asset composition ratio of stocks and bonds for a bank taking into consideration the correlation between the interest rate risk and equity risk in the financial capital market using a portfolio model. The analysis reveals that in determining the asset composition ratio in Japan, the correlation coefficient between the interest rate and stock prices as well as the stock price volatility plays a more important role than the interest rate volatility. We also show that in the present circumstances, the stockholding ratios of most financial institutions in Japan are higher than the

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