Behavioral approach to Arbitrage Pricing Theory
AbstractIn this paper, I have examined the relation between expected returns and measures of systematic risk stemming from macroeconomic factors studied by Chen, Roll and Ross (1986, hereafter CRR) for a different time period (1978-2007) and different formation of portfolios (based on ME and BE/ME). Like CRR, I’ve used a version of Fama and MacBeth’s (1973) two-pass cross-sectional regression (CSR) methodology. Apparently, changing the time period and formation of portfolio lead to noticeably different conclusions. Using the same macrofactors as CRR only factor related to the change in expected inflation (DEI) is significantly priced in the overall period. The sample mean of the Industrial production factor (MP), a highly significant factor in CRR, is insignificant, although positive, for this period. Adding a sixth factor that captures the investor’s confidence in the market is quite insensitive to other marcofactors. However, both the five factor by CRR and proposed six factor model show evidence of joint significance, which is a new property entered in this paper.
Download InfoIf 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.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 26343.
Date of creation: Apr 2010
Date of revision:
Asset pricing; APT; Macro factors; Multifactor; Confidence;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-13 (All new papers)
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.:
- Shanken, Jay & Weinstein, Mark I., 2006. "Economic forces and the stock market revisited," Journal of Empirical Finance, Elsevier, Elsevier, vol. 13(2), pages 129-144, March.
- David M. Cutler & James M. Poterba & Lawrence H. Summers, 1988.
"What Moves Stock Prices?,"
NBER Working Papers
2538, National Bureau of Economic Research, Inc.
- David H. Cutler & James M. Poterba & Lawrence H. Summers, 1988. "What Moves Stock Prices?," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 487, Massachusetts Institute of Technology (MIT), Department of Economics.
- Castanias, Richard P, II, 1979. "Macroinformation and the Variability of Stock Market Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 34(2), pages 439-50, May.
- Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, Econometric Society, vol. 41(5), pages 867-87, September.
- Chan, K C, 1988. "On the Contrarian Investment Strategy," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 61(2), pages 147-63, April.
- Shanken, Jay, 1987. "Multivariate proxies and asset pricing relations : Living with the Roll critique," Journal of Financial Economics, Elsevier, Elsevier, vol. 18(1), pages 91-110, March.
- Mark J. Flannery & Aris A. Protopapadakis, 2002. "Macroeconomic Factors Do Influence Aggregate Stock Returns," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(3), pages 751-782.
- Chan, K. C. & Chen, Nai-fu & Hsieh, David A., 1985. "An exploratory investigation of the firm size effect," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(3), pages 451-471, September.
- Douglas K. Pearce & V. Vance Roley, 1985.
"Stock Prices and Economic News,"
NBER Working Papers
1296, National Bureau of Economic Research, Inc.
- Pearce, Douglas K & Roley, V Vance, 1985. "Stock Prices and Economic News," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 58(1), pages 49-67, January.
- Roll, Richard & Ross, Stephen A, 1980. " An Empirical Investigation of the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, American Finance Association, vol. 35(5), pages 1073-1103, December.
- Brown, Stephen J & Weinstein, Mark I, 1983. " A New Approach to Testing Asset Pricing Models: The Bilinear Paradigm," Journal of Finance, American Finance Association, American Finance Association, vol. 38(3), pages 711-43, June.
- Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, Elsevier, vol. 13(3), pages 341-360, December.
- Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 59(3), pages 383-403, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.