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A Semiautoregression Approach to the Arbitrage Pricing Theory

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  • Mei, Jianping

Abstract

This paper develops a semiautoregression approach to estimate factors of the arbitrage pricing theory that has the advantage of providing a simple asymptotic variance-covariance matrix for the factor estimates, which makes it easy to adjust for measurement errors. Using the extracted factors, the author confirms the finding that the arbitrage pricing theory describes asset returns slightly better than the capital asset pricing model, although there is still some mispricing in the arbitrage pricing theory model. The author finds that not only are the factors priced by the market, but the factor premiums move over time in relation to business cycle variables. Copyright 1993 by American Finance Association.

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  • Mei, Jianping, 1993. "A Semiautoregression Approach to the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 48(2), pages 599-620, June.
    • Handle: RePEc:bla:jfinan:v:48:y:1993:i:2:p:599-620
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    Cited by:

    1. Angbazo, Lazarus A. & Mei, Jianping & Saunders, Anthony, 1998. "Credit spreads in the market for highly leveraged transaction loans," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1249-1282, October.
    2. Nawalkha, Sanjay K., 1997. "A multibeta representation theorem for linear asset pricing theories," Journal of Financial Economics, Elsevier, vol. 46(3), pages 357-381, December.
    3. Erdinc Altay, 2003. "The Effect of Macroeconomic Factors on Asset Returns: A Comparative Analysis of the German and the Turkish Stock Markets in an APT Framework," Finance 0307006, University Library of Munich, Germany.
    4. Patrick McGuire & Martijn A Schrijvers, 2003. "Common factors in emerging market spreads," BIS Quarterly Review, Bank for International Settlements, December.
    5. Priestley, Richard, 1996. "The arbitrage pricing theory, macroeconomic and financial factors, and expectations generating processes," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 869-890, June.
    6. Thierry Vessereau, 2000. "Factor Analysis and Independent Component Analysis in Presence of High Idiosyncratic Risks," CIRANO Working Papers 2000s-46, CIRANO.
    7. Enrique Sentana, 1993. "The econometrics of the stock market II: asset pricing," Investigaciones Economicas, Fundación SEPI, vol. 17(3), pages 421-444, September.

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