Assume stock return and interest rate evolve as follows:

xt = α + βrt + ut , (1)
ut = σt zt , (2)
σt2 =c+ au2t−1 + 2
bσt−1 + γrt , (3)
rt = φ + ρrt−1 + ςvt , (4)

where zt , vt are standard white noises.

1 Asymptotic properties of β̂
First we consider that
PT PT
1/2 1/2 t=1 xt (rt − r̄t ) T −1/2 t=1 ut (rt − r̄t )
T (β̂ − β) = T ( PT − β) = PT . (5)
2 −1 − r̄t )2
t=1 (rt − r̄t ) T t=1 (rt

To apply Slutsky’s lemma, we investigate its denominator and numerator separately.

Its denominator in matrix form reads

T −1 r0 (I − T −1 110 )r, (6)

where I is the unit matrix and 1 is the vector of ones. Similarly, (4) can be written as

r = (I − ρJ)−1 (φ1 + ςv), (7)

where J is the upper shift matirx. Plugging (7) into (6) leads to

T −1 (φ1 + ςv)0 (I − ρJ 0 )−1 (I − T −1 110 )(I − ρJ)−1 (φ1 + ςv). (8)

Denote that

Ω := (I − ρJ 0 )−1 (I − T −1 110 )(I − ρJ)−1 := W ΛW 0 . (9)

Then the denominator again becomes

T
X
T −1 λ2i (φwiT 1 + ςwiT v)2 . (10)
t=1