Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Empirical Foundations of the Arbitrage Pricing Theory I: The Empirical Tests

Contents:

Author Info

  • Bruce N. Lehmann
  • David M. Modest
Registered author(s):

    Abstract

    This paper provides a detailed and extensive examination of the validity of the APT based on maximum likelihood factor analysis of large cross-sections of securities. Our empirical implementation of the theory proved in capable of explaining expected returns on portfolios composed of securities with different market capitalizations although it provided an adequate account of the expected returns of portfolios formed on the basis of dividend yield and own variance where risk adjustment with the CAPM employing the usual market proxies failed. In addition, it appears that the zero beta version of the APT is sharply rejected in favor of the riskless rate model and that there is little basis for discriminating among five and ten factor versions of the theory.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nber.org/papers/w1725.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1725.

    as in new window
    Length:
    Date of creation: Oct 1985
    Date of revision:
    Publication status: published as "The Empirical Foundations of the Arbitrage Pricing Theory." From Journal of Financial Economics, Vol. 21, No. 2, pp. 213-254, (September 1988).(NOTE: R1221 is based on BOTH W1725 and W1726.)
    Handle: RePEc:nbr:nberwo:1725

    Note: ME
    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    References

    References listed on IDEAS
    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.:
    as in new window
    1. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
    2. King, R.G. & Rebelo, S.T., 1989. "Low Frequency Filtering And Real Business Cycles," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 205, University of Rochester - Center for Economic Research (RCER).
    3. Leonardo Hernández & Klaus Schmidt-Hebbel, 2001. "Banking, financial integration, and international crises : an overview," Working Papers Central Bank of Chile, Central Bank of Chile 100, Central Bank of Chile.
    4. Raghuram G. Rajan, 2004. "Dollar Shortages and Crises," NBER Working Papers 10845, National Bureau of Economic Research, Inc.
    5. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, Elsevier, vol. 19(1-2), pages 1-24.
    6. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
    7. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, Elsevier, vol. 73(2), pages 223-250, November.
    8. Federico Sturzenegger & Jeromin Zettelmeyer, 2007. "Debt Defaults and Lessons from a Decade of Crises," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262195534, December.
    9. Enrica Detragiache & Asli Demirgüç-Kunt, 1998. "Financial Liberalization and Financial Fragility," IMF Working Papers, International Monetary Fund 98/83, International Monetary Fund.
    10. Obstfeld, Maurice & Shambaugh, Jay C & Taylor, Alan M, 2008. "Financial Stability, the Trilemma, and International Reserves," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6693, C.E.P.R. Discussion Papers.
    11. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
    12. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2011. "Market Freedom and the Global Recession," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 59(1), pages 111-135, April.
    13. Fratzscher, Marcel & Matthieu Bussiere, 2003. "Towards A New Early Warning System of Financial Crises," Royal Economic Society Annual Conference 2003, Royal Economic Society 81, Royal Economic Society.
    14. René M. Stulz, 2007. "The Limits of Financial Globalization," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 19(1), pages 8-15.
    15. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 544, Board of Governors of the Federal Reserve System (U.S.).
    16. Rose, Andrew K & Spiegel, Mark, 2009. "Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7466, C.E.P.R. Discussion Papers.
    17. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 534, Board of Governors of the Federal Reserve System (U.S.).
    18. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
    19. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," IDB Publications 6467, Inter-American Development Bank.
    20. Honig, Adam, 2009. "Dollarization, exchange rate regimes and government quality," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(2), pages 198-214, March.
    21. Glick,Reuven & Moreno,Ramon & Spiegel,Mark M. (ed.), 2001. "Financial Crises in Emerging Markets," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521800204.
    22. Nicolo, Gianni De & Honohan, Patrick & Ize, Alain, 2005. "Dollarization of bank deposits: Causes and consequences," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(7), pages 1697-1727, July.
    23. Andrew K. Rose & Mark M. Spiegel, 2009. "Cross-country causes and consequences of the 2008 crisis: early warning," Working Paper Series, Federal Reserve Bank of San Francisco 2009-17, Federal Reserve Bank of San Francisco.
    24. Gupta, Poonam & Mishra, Deepak & Sahay, Ratna, 2007. "Behavior of output during currency crises," Journal of International Economics, Elsevier, Elsevier, vol. 72(2), pages 428-450, July.
    25. Rose, Andrew K. & Spiegel, Mark M., 2011. "Cross-country causes and consequences of the crisis: An update," European Economic Review, Elsevier, Elsevier, vol. 55(3), pages 309-324, April.
    26. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 373, July.
    27. Honohan, Patrick & Klingebiel, Daniela, 2003. "The fiscal cost implications of an accommodating approach to banking crises," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(8), pages 1539-1560, August.
    28. Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(4), pages 561-586, August.
    29. Reuven Glick & Ramon Moreno & Mark Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue mar.23.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Marco Del Negro, 1999. "Asymmetric shocks among U.S. states," Working Papers, Centro de Investigacion Economica, ITAM 9903, Centro de Investigacion Economica, ITAM.
    2. Robin Brooks, & Marc Del Negro, 2005. "Firm-Level Evidence on International Stock Market Comovement," Kiel Working Papers 1244, Kiel Institute for the World Economy.
    3. Miklos Koren & Silvana Tenreyro, 2005. "Volatility and development," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 5312, London School of Economics and Political Science, LSE Library.
    4. Marco Del Negro & Robin Brooks, 2005. "A Latent Factor Model with Global, Country, and Industry Shocks for International Stock Returns," IMF Working Papers, International Monetary Fund 05/52, International Monetary Fund.
    5. Miklos Koren & Silvana Tenreyro, 2003. "Diversification and development," Working Papers, Federal Reserve Bank of Boston 03-3, Federal Reserve Bank of Boston.
    6. Bruce N. Lehmann, 1986. "Residual Risk Revisited," NBER Working Papers 1908, National Bureau of Economic Research, Inc.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1725. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.