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Discussion Paper Discussion Paper 135 (2012.2)

[No.135] Strategy switching in the Japanese stock market

Ryuichi Yamamoto/National Chengchi University
Hideaki Hirata/Japan Center for Economic Research and Hosei University



This paper discusses the expectation formation process of Japanese stock market professionals and how their expectations are related to larger fluctuations of the TOPIX price than those of economic fundamentals. By utilizing a monthly forecast survey dataset on the TOPIX distributed by QUICK Corporation, we sort forecasters into buy-side and sell-side professionals. We first demonstrate that the buy-side and sell-side professionals use both fundamental and technical trading strategies throughout their expectation formation processes and that they switch between fundamental and technical trading strategies over time. We then empirically show that strategy switching is key in understanding the persistent deviation of the TOPIX from the fundamentals.