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Some Results in the Theory of Arbitrage Pricing
Author(s) -
INGERSOLL JONATHAN E.
Publication year - 1984
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1984.tb03890.x
Subject(s) - arbitrage pricing theory , econometrics , capital asset pricing model , arbitrage , fundamental theorem of asset pricing , economics , covariance , intuition , investment theory , rational pricing , uncorrelated , mathematical economics , financial economics , preference , asset (computer security) , microeconomics , mathematics , computer science , statistics , philosophy , computer security , epistemology
This paper derives a stronger version of Huberman's recent “preference free” pricing theorem. This pricing result relates the expected return on an asset to its factor responses and the covariance structure of the residuals from a linear factor model. It must characterize any infinite asset economy in which no arbitrage opportunities are present whether or not the factor model has uncorrelated residuals. This result provides the intuition for the role of residual risk in the pricing model and eliminates some classes of arbitrage opportunities still present under Huberman's bound. Some applications to empirical tests and performance measurement are also discussed.