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

@article{Engle1988AssetPW,
  title={Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills},
  author={Robert F. Engle and Victor K. Ng and Michael L. Rothschild},
  journal={Capital Markets: Asset Pricing \& Valuation},
  year={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… 

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