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The APT Model as Reduced-Rank Regression

Author

Listed:
  • Bekker, Paul
  • Dobbelstein, Pascal
  • Wansbeek, Tom

Abstract

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.

Suggested Citation

  • Bekker, Paul & Dobbelstein, Pascal & Wansbeek, Tom, 1996. "The APT Model as Reduced-Rank Regression," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(2), pages 199-202, April.
    • Handle: RePEc:bes:jnlbes:v:14:y:1996:i:2:p:199-202
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    Citations

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    Cited by:

    1. Gospodinov, Nikolay & Kan, Raymond & Robotti, Cesare, 2019. "Too good to be true? Fallacies in evaluating risk factor models," Journal of Financial Economics, Elsevier, vol. 132(2), pages 451-471.
    2. Bruno Feunou & Jean-Sébastien Fontaine & Abderrahim Taamouti & Roméo Tédongap, 2014. "Risk Premium, Variance Premium, and the Maturity Structure of Uncertainty," Review of Finance, European Finance Association, vol. 18(1), pages 219-269.
    3. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc.
    4. Anna Pirogova & Antonio Roma, 2020. "Performance of value‐ and size‐based strategies in the Italian stock market," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 49(1), February.
    5. Ziping Zhao & Daniel P. Palomar, 2018. "Sparse Reduced Rank Regression With Nonconvex Regularization," Papers 1803.07247, arXiv.org.
    6. Gonzalo Camba-Mendez & George Kapetanios, 2005. "Statistical Tests of the Rank of a Matrix and Their Applications in Econometric Modelling," Working Papers 541, Queen Mary University of London, School of Economics and Finance.

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