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An Investigation into the Role of the Market Portfolio in the Arbitrage Pricing Theory

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  • Born, Jeffery A
  • Moser, James T

Abstract

This paper investigates the role of the market portfolio in the arbitrage pricing theory. The authors show that if the multifactor return-generating process put forth in the arbitrage pricing theory is valid, then unexpected deviation in the return on the market portfolio must be completely explained by unexpected deviations in the underlying return-generating factors. As well, market betas are developed as a combination of return-generating factor sensitivity coefficients. These results lead them to conclude that an empirically significant "market factor" is evidence of omitted return-generating factors, rather than evidence that the market is a factor. Finally, results obtained when market betas are regressed against factor sensi tivity coefficients are consistent with these insights. The results s uggest that there are at least three return-generating factors. This evidence does not rely on ex post pricing of estimated factors. Copyright 1988 by MIT Press.

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Bibliographic Info

Article provided by Eastern Finance Association in its journal The Financial Review.

Volume (Year): 23 (1988)
Issue (Month): 3 (August)
Pages: 287-99

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Handle: RePEc:bla:finrev:v:23:y:1988:i:3:p:287-99

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Web page: http://www.easternfinance.org/
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Web: http://www.blackwellpublishing.com/subs.asp?ref=0732-8516

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Cited by:
  1. Suat Teker & Oscar Varela, 1998. "A comparative analysis of security pricing using factor, macrovariable and arbitrage pricing models," Journal of Economics and Finance, Springer, vol. 22(2), pages 21-41, June.

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