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A Semiautoregression Approach to the Arbitrage Pricing Theory
Author(s) -
MEI JIANPING
Publication year - 1993
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.1540-6261.1993.tb04729.x
Subject(s) - capital asset pricing model , arbitrage pricing theory , econometrics , arbitrage , investment theory , economics , covariance matrix , variance (accounting) , factor analysis , covariance , asset (computer security) , simple (philosophy) , financial economics , mathematics , computer science , statistics , accounting , computer security , philosophy , epistemology
This paper developes a semiautoregression (SAR) approach to estimate factors of the arbitrage pricing theory (APT) that has the advantage of providing a simple asymptotic variance‐covariance matrix for the factor estimates, which makes it easy to adjust for measurement errors. Using the extracted factors, I confirm the finding that the APT describes asset returns slightly better than the CAPM, although there is still some mispricing in the APT model. I find that not only are the factors “priced” by the market, but the factor premiums move over time in relation to business cycle variables.