Stability conditions for heteroscedastic factor models with conditionally autogressive betas

Stability conditions for heteroscedastic factor models with conditionally autogressive betas
Document type
Working Paper
Author(s)
Christodoulakis, George; Satchell, Stephen
Publisher
Manchester Business School
Date of publication
1 September 2006
Series
University of Manchester Business School Working Papers. No. 488
Subject(s)
Trends: economic, social and technology trends affecting business
Collection
Business and management
Material type
Reports

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This paper characterizes the stability properties of a heteroscedastic and conditionally known multi model of financial asset returns, with beta coefficients driven by general conditionally autorergressive processes. The analysis derives closed-form sufficient conditions for the existence of strictly stationary solutions for the composite asset conditional variances and covariances, not known previously in the literature. The paper shows that stability is guaranteed when both individuals process and cross-process restrictions hold. The results are also applicable to the study of the co-movement between volatility and beta coefficients as well as between beta coefficients themselves.

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