Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills

Robert Engle, Victor Ng and Michael Rothschild ()

No 65, NBER Technical Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1988-11
Note: ME
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Citations: View citations in EconPapers (7)

Published as Journal of Econometrics, Vol. 45, No. 1/2, pp. 213-237, (July/August 1990).

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Journal Article: Asset pricing with a factor-arch covariance structure: Empirical estimates for treasury bills (1990)
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