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The Magnitude of Pricing Errors in the Arbitrage Pricing Theory

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  • Robin, Ashok
  • Shukla, Ravi

Abstract

In this paper the arbitrage pricing theory (APT) pricing errors for individual securities are estimated employing maximum likelihood factor analysis and Fama-MacBeth style aggregation. Results show that the pricing errors are large and statistically significant and that there is a high degree of variability in pricing errors across securities. This evidence contradicts the prevailing APT intuition that the pricing errors can be ignored as negligible. Pricing errors are also found to be related to residual variance and firm size.

Suggested Citation

  • Robin, Ashok & Shukla, Ravi, 1991. "The Magnitude of Pricing Errors in the Arbitrage Pricing Theory," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 14(1), pages 65-82, Spring.
  • Handle: RePEc:bla:jfnres:v:14:y:1991:i:1:p:65-82
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    References listed on IDEAS

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    Cited by:

    1. Chadwick, Meltem, 2010. "Performance of Bayesian Latent Factor Models in Measuring Pricing Errors," MPRA Paper 79060, University Library of Munich, Germany.
    2. Michailidis, G., 2009. "Multivariate methods in examining macroeconomic variables effect on Greek stock market returns, 1997-2004," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(1).

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