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A Two-Factor ARCH Model for Deposit-Institution Stock Returns

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  • Song, Frank M

Abstract

This paper specifies a two-factor model for a sample of deposit institutions. The factors are the market return and an interest rate factor. The two-factor model is specified with Autoregressive Conditional Heteroskedacity (ARCH) modeling strategy and is estimated by Generalized Method of Moments (GMM). The market and interest rate risks are measured by their time-varying betas. The results suggest that the market risks have been volatile over the sample period 1977-87 and they increased and became more volatile after 1982. The interest rate risks were more stable and they did not respond to the Fed's regime change in monetary policy in 1979 and 1982. Specification tests suggest the usefulness of my two-factor ARCH model in the study of deposit-institution stock returns. Copyright 1994 by Ohio State University Press.

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  • Song, Frank M, 1994. "A Two-Factor ARCH Model for Deposit-Institution Stock Returns," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(2), pages 323-340, May.
    • Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:2:p:323-40
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