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Arbitrage pricing theory

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Author Info
Gur Huberman
Zhenyu Wang

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Abstract

Focusing on capital asset returns governed by a factor structure, the Arbitrage Pricing Theory (APT) is a one-period model, in which preclusion of arbitrage over static portfolios of these assets leads to a linear relation between the expected return and its covariance with the factors. The APT, however, does not preclude arbitrage over dynamic portfolios. Consequently, applying the model to evaluate managed portfolios is contradictory to the no-arbitrage spirit of the model. An empirical test of the APT entails a procedure to identify features of the underlying factor structure rather than merely a collection of mean-variance efficient factor portfolios that satisfies the linear relation.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 216.

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Date of creation: 2005
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Handle: RePEc:fip:fednsr:216

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Keywords: Arbitrage - Econometric models ; Stock - Prices ; Portfolio management;

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ram T. S. Ramakrishnan & Anjan V. Thakor, 2004. "The Valuation of Assets under Moral Hazard," Finance 0411032, EconWPA. [Downloadable!]
    Other versions:
  2. M Ali Khan & Yeneng Sun, 2002. "Exact Arbitrage Well-Diversified Potfolios and Asset Pricing in Large Markets," Economics Working Paper Archive 483, The Johns Hopkins University,Department of Economics. [Downloadable!]
    Other versions:
  3. Richard Sweeney & Arthur Warga, 1984. "The Pricing of Unanticipated Changes in Expected Inflation: Evidence from the Stock Market," University of California at Los Angeles, Anderson Graduate School of Management 1218, Anderson Graduate School of Management, UCLA. [Downloadable!]
  4. M. Ali Khan & Yeneng Sun, 1996. "Hyperfinite Asset Pricing Theory," Cowles Foundation Discussion Papers 1139, Cowles Foundation, Yale University. [Downloadable!]
  5. John Ammer, 1993. "Macroeconomic risk and asset pricing: estimating the apt with observable factors," International Finance Discussion Papers 448, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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