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THE MAGNITUDE OF PRICING ERRORS IN THE ARBITRAGE PRICING THEORY
Author(s) -
Robin Ashok,
Shukla Ravi
Publication year - 1991
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1991.tb00645.x
Subject(s) - arbitrage pricing theory , investment theory , arbitrage , econometrics , economics , capital asset pricing model , rational pricing , intuition , financial economics , psychology , cognitive science
In this paper the arbitrage pricing theory (APT) pricing errors for individual securities are estimated employing maximum likelihood factor analysis and Fama‐MacBeth style aggregation. Results show that the pricing errors are large and statistically significant and that there is a high degree of variability in pricing errors across securities. This evidence contradicts the prevailing APT intuition that the pricing errors can be ignored as negligible. Pricing errors are also found to be related to residual variance and firm size.