Article1985

Yes, The APT Is Testable

125 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Stochastic processes and financial applications Financial Risk and Volatility Modeling

Abstract

ABSTRACT The Arbitrage Pricing Theory (APT) has been proposed as an alternative to the mean‐variance Capital Asset Pricing Model (CAPM). This paper considers the testability of the APT and points out the irrelevance for testing of the approximation error. We refute Shanken's objections, including his assertion that Roll's critique of the CAPM is applicable to the APT. We also explain the testability of the APT on subsets, and we explore the relationship between the APT and the CAPM.

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References

1976The arbitrage theory of capital asset pricing 1977A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory 1985An Intertemporal General Equilibrium Model of Asset Prices 1980An Empirical Investigation of the Arbitrage Pricing Theory 1983Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets 1982Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets 1982The Economics of Information and Uncertainty 1985An exploratory investigation of the firm size effect

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