Exploring the Priced Factors in ICAPM in Japan

This paper investigates the priced factors in the Intertemporal Capital Asset Pricing Model (ICAPM) in the Tokyo Stock Exchange (TSE) in Japan. Focusing on the time-varying covariance risks derived by the multivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model, we find new priced state variables in Japan. That is, our empirical tests reveal that in the TSE, the time-varying covariance between market return and illiquidity measure and that between market return and the log change of the seasonally adjusted industrial production are statistically significantly priced state variables in the ICAPM.