Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills
AbstractAsset pricing relations are developed for a vector of assets with a time varying covariance structure. Assuming that the eigenvectors are constant but the eigenvalues changing, both the Capital Asset Pricing Model and the Arbitrage Pricing Theory suggest the same testable implication: the time varying part of risk premia are proportional to the time varying eigenvalues. Specifying the eigenvalues as general ARCH processes. the model is a multivariate Factor ARCH model. Univariate portfolios corresponding to the eigenvectors will have (time varying) risk premia proportional to their own (time varying) variance and can be estimated using the GARCH-M model. This structure is applied to monthly treasury bills from two to twelve months maturity and the value weighted NYSE returns index. The bills appear to have a single factor in the variance process and this factor is influenced or "caused in variance" by the stock returns.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0065.
Date of creation: Nov 1988
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Publication status: published as Journal of Econometrics, Vol. 45, No. 1/2, pp. 213-237, (July/August 1990).
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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- Engle, Robert F. & Ng, Victor K. & Rothschild, Michael, 1990. "Asset pricing with a factor-arch covariance structure : Empirical estimates for treasury bills," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 213-237.
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