Premium
The Arbitrage Pricing Theory and Supershares
Author(s) -
LATHAM MARK
Publication year - 1989
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.1540-6261.1989.tb05057.x
Subject(s) - stochastic game , arbitrage pricing theory , arbitrage , economics , econometrics , fundamental theorem of asset pricing , mathematical economics , market portfolio , rational pricing , portfolio , variance (accounting) , capital asset pricing model , set (abstract data type) , financial economics , computer science , accounting , programming language
In a single‐period model with options on the market portfolio, linear factor pricing holds if and only if the variance of the market conditional on the factors is zero. There is no need for factors other than nonlinear functions of the market. For accurate linear pricing of all payoff patterns the factors must be rotationally equivalent to Hakansson's “supershares.” In a multiperiod model, a similar set of results holds, but with consumption replacing the market payoff. The methodology of the empirical Arbitrage Pricing Theory literature is not consistent with either the single‐period model or the multiperiod model.