TY - JOUR
AU - Engle,Robert F.
AU - Ng,Victor
AU - Rothschild,Michael
TI - Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills
JF - National Bureau of Economic Research Technical Working Paper Series
VL - No. 65
PY - 1988
Y2 - November 1988
DO - 10.3386/t0065
UR - http://www.nber.org/papers/t0065
L1 - http://www.nber.org/papers/t0065.pdf
N1 - Author contact info:
Robert F. Engle, III
Department of Finance, Stern School of Business
New York University, Salomon Center
44 West 4th Street, Suite 9-160
New York, NY 10012-1126
Tel: 212/998-0710
Fax: 212/995-4220
E-Mail: rengle@stern.nyu.edu
Victor Ng
Goldman Sachs
E-Mail: victor.k.ng@gs.com
Michael Rothschild
531 14th Street
Santa Monica, CA 90402
Tel: 310-394-6010
Fax: 310-593-4401
E-Mail: mrothsch@princeton.edu
AB - 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.
ER -