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A Multivariate Test of an Equilibrium APT with Time Varying Risk Premia in the Australian Equity Market

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  • Robert W. Faff

    (Department of Accounting and Finance, Monash University, Clayton VIC 3168.)

Abstract

This paper applies an asymptotic principal components technique, developed by Connor and Korajczyk (1988), to test an equilibrium version of the Arbitrage Pricing Theory (APT), which permits time varying risk premia, using Australian equity data. Cross-equation restrictions imposed by the APT on a multivariate regression of excess returns on derived factors are tested. Both one-step and iterative versions of the technique are used and results are compared to the capital asset pricing model (CAPM). While the APT appears to perfor M better than the CAPM, neither model can adequately explain monthly seasonal mispricing in Australian equities.

Suggested Citation

  • Robert W. Faff, 1993. "A Multivariate Test of an Equilibrium APT with Time Varying Risk Premia in the Australian Equity Market," Australian Journal of Management, Australian School of Business, vol. 17(2), pages 233-258, December.
    • Handle: RePEc:sae:ausman:v:17:y:1993:i:2:p:233-258
    DOI: 10.1177/031289629301700204
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    References listed on IDEAS

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