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GARCH-based identification of triangular systems with an application to the CAPM: still living with the roll critique

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Todd Prono
Abstract

This paper presents a new method for identifying triangular systems of time-series data. Identification is the product of a bivariate GARCH process. Relative to the literature on GARCH-based identification, this method distinguishes itself both by allowing for a time-varying covariance and by not requiring a complete estimation of the GARCH parameters. Estimation follows OLS and standard univariate GARCH and ARMA techniques, or GMM. A Monte Carlo study of the GMM estimator is provided. The identification method is then applied in testing a conditional version of the CAPM. ; Quantitative Analysis Unit Working Paper QAU07-2

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 07-1.

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Date of creation: 2006
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Handle: RePEc:fip:fedbwp:07-1

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Keywords: Capital assets pricing model ; Time-series analysis;

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