Abstract:
In this paper I present a new single factor model for assets return observed in
discrete time and its latent volatility with a common \market factor". This model
attempts to unify the concept of feedback e ect and skewness in return distribu-
tion. Further, it generalizes existing stochastic volatility model with constant feedback
to a framework with time varying feedback. As an immediate consequence dynamic
skewness and leverage e ect follows. However, the dynamic structure violates weak-
stationarity assumption usually considered for the heteroskedastic models for returns
and hence the concept of bounded stationarity is introduced to address the issue of non-
stationarity. The single factor model also helps to reduce the number of parameters
to be estimated compared to existing SV models with separate feedback and skewness
parameters. A characterization of the error distributions for returns and volatility is
provided on the basis of existence of conditional moments. Finally, an application
of the model has been explained with Normal error and half Normal market factor
distribution.
