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@techreport{NBERt0065,
title = "Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills",
author = "Robert F. Engle and Victor Ng and Michael Rothschild",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Technical Working Paper Series",
number = "65",
year = "1988",
month = "November",
doi = {10.3386/t0065},
URL = "http://www.nber.org/papers/t0065",
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.},
}