Do Fixed Income Securities Also Show Asymmetric Effects in Conditional Second Moments?
74 Pages Posted: 16 Nov 2000
Date Written: July 2000
This paper estimates a trivariate two-factor conditional version of the Intertemporal CAPM of Merton (1973). The three considered assets are: US stocks, 6-month T-bills, and 10-year government bonds. As a second factor the growth rate of industrial production is chosen. Two multivariate GARCH processes able to capture the asymmetric effects for both conditional variances and covariances are developed and tested. News impact curves and surfaces as well as robust conditional moment tests (Engle and Ng, 1993, and Kroner and Ng, 1998) indicate that conditional second moments for equities as well as fixed income securities do respond asymmetrically to past positive and negative news. Finally, the prices of market and intertemporal risk, first held constant, are next allowed to vary over time according to the regime switching model of Hamilton (1988, 1989, 1990, 1994). The two identified states might reflect a switch in investors' preferences whose degree of risk aversion increases in correspondence to or after financial turmoil.
Keywords: Intertemporal CAPM, business cycle, assymetric multivariate GARCH-in-Mean, regime shifts
JEL Classification: C32, E32, G12
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