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Measuring the Pricing Error of the Arbitrage Pricing Theory

Author

Listed:
  • John Geweke

    (University of Minnesota
    Federal Reserve Bank of Minneapolis)

  • Guofu Zhou

    (Washington University)

Abstract

This article provides an exact Bayesian framework for analyzing the arbitrage pricing theory (APT). Based on the Gibbs sampler, we show how to obtain the exact posterior distributions for functions of interest in the factor modeL In particular, we propose a measure of the APT pricing deviations and obtain its exact posterior distribution. Using monthly portfolio returns grouped by industry and market capitalization, we find that there is little improvement in reducing the pricing errors by including more factors beyond the first one.

Suggested Citation

  • John Geweke & Guofu Zhou, 1996. "Measuring the Pricing Error of the Arbitrage Pricing Theory," CEMA Working Papers 276, China Economics and Management Academy, Central University of Finance and Economics.
  • Handle: RePEc:cuf:wpaper:276
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    References listed on IDEAS

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