Article1988

Joint Estimation of Factor Sensitivities and Risk Premia for the Arbitrage Pricing Theory

187 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Risk and Volatility Modeling

Abstract

ABSTRACT The APT is represented as a multivariate regression model with across‐equations restrictions. Both observed and unobserved (latent) macroeconomic factors are included, thus generalizing and unifying two previous strands of literature. Large portfolios representing unobserved factors are treated as endogenous, and nonlinear 3SLS estimates are shown to differ sharply from estimates that ignore this endogeneity. Using monthly stock returns and six factors, we cannot reject January effects. The following results are invariant with respect to the inclusion of January effects: we reject the CAPM in favor of the APT; however, we cannot reject the APT restrictions on the linear factor model.

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References

1978Specification Tests in Econometrics 1986Economic Forces and the Stock Market 1988Theory of Financial Decision Making.1980An Empirical Investigation of the Arbitrage Pricing Theory 1971Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series 1982Multivariate tests of financial models 1987Mean-Variance Spanning 1985An exploratory investigation of the firm size effect

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1991MACROECONOMIC FACTORS AND THE UK STOCK MARKET 1988Arbitrage Pricing Theory as a Restricted Nonlinear Multivariate Regression Model Iterated Nonlinear Seemingly Unrelated Regression Estimates 1994MACROECONOMIC FACTORS, THE APT AND THE UK STOCKMARKET 2021The COVID-19 storm and the energy sector: The impact and role of uncertainty 1998Macroeconomic variables as common pervasive risk factors and the empirical content of the arbitrage pricing theory 1996The arbitrage pricing theory, macroeconomic and financial factors, and expectations generating processes

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