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A linear varying coefficient ARCH-M model with a latent variable

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Abstract

Motivated by the psychological factor of time-varying risk-return relationship, this article studies a linear varying coefficient ARCH-M model with a latent variable. Due to the unobservable property of the latent variable, a corrected likelihood method is employed for parametric estimation. Estimators are proved to be consistent and asymptotically normal under certain regularity conditions. A simple test statistic is also proposed for testing latent variable effect. Simulation results confirm that the proposed estimators and test perform well. The model is further applied to examine whether the risk-return relationship depends on investor’s sentiment in American Market and some explainable results are obtained.

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Authors and Affiliations

  1. School of Economics and Statistics, Guangzhou University, Guangzhou, 510006, China

    ZeFang Song, XingFa Zhang, Yuan Li & Qiang Xiong

  2. Lingnan Research Center for Statistical Science, Guangzhou University, Guangzhou, 510006, China

    ZeFang Song, XingFa Zhang, Yuan Li & Qiang Xiong

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  1. ZeFang Song
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  2. XingFa Zhang
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  3. Yuan Li
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  4. Qiang Xiong
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Correspondence to XingFa Zhang.

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Song, Z., Zhang, X., Li, Y. et al. A linear varying coefficient ARCH-M model with a latent variable. Sci. China Math. 59, 1795–1814 (2016). https://doi.org/10.1007/s11425-016-5151-4

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