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Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?

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  • Ferson, Wayne E
  • Korajczyk, Robert A

Abstract

This article studies predictability in U.S. stock returns for multiple investment horizons. The authors measure to what extent predictability is driven by premiums for economywide risk factors, comparing two standard methods for factor selection. They study single-beta models and multiple-beta models. The authors show how to estimate the fraction of the predictability in returns captured by the model simultaneously with the other parameters. Their analysis indicates that the models capture a large fraction of the predictability for all of the investment horizons. The performance of the principal components and the prespecified-factor approaches are broadly similar. Copyright 1995 by University of Chicago Press.

Suggested Citation

  • Ferson, Wayne E & Korajczyk, Robert A, 1995. "Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?," The Journal of Business, University of Chicago Press, vol. 68(3), pages 309-349, July.
    • Handle: RePEc:ucp:jnlbus:v:68:y:1995:i:3:p:309-49
    DOI: 10.1086/296667
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