Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills / Robert F. Engle, Victor Ng, Michael Rothschild.

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Engle, Robert F

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Material type: Text

TextSeries: Technical Working Paper Series (National Bureau of Economic Research) ; no. t0065.Publication details: Cambridge, Mass. National Bureau of Economic Research 1988.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: Asset 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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Previous	nber t0062 Consistent Covariance Matrix Estimation with Cross-Sectional Dependence and Heteroskedasticity in Cross-Sectional Financial Data /	nber t0063 Spurious Trend and Cycle in the State Space Decomposition of a Time Series with a Unit Root /	nber t0064 Exchange-Rate Dynamics and Optimal Asset Accumulation Revisited /	nber t0065 Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills /	nber t0066 The Size and Power of the Variance Ratio Test in Finite Samples: A Monte Carlo Investigation /	nber t0067 The Dividend Ratio Model and Small Sample Bias: A Monte Carlo Study /	nber t0068 Some Further Results on the Exact Small Sample Properties of the Instrumental Variable Estimator /	Next

November 1988.

Asset 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.