Integrating the two steps of an arbitrage pricing theory (APT) model leads to a reduced rank regression (RRR) model. So the results on RRR can be used to estimate APT models, making estimation very simple. The authors give a succinct derivation of estimation of RRR, derive the asymptotic variance of RRR estimators for a general cause, and discuss how undersized samples (more assets than time periods) can be dealt with.
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Volume (Year): 14 (1996) Issue (Month): 2 (April) Pages: 199-202 Download reference. The following formats are available: HTML
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James H. Stock & Mark W. Watson, 1998.
"Diffusion Indexes,"
NBER Working Papers
6702, National Bureau of Economic Research, Inc.
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