Measuring the Pricing Error of the Arbitrage Price Theory

Publisher:
Oxford University Press
Publication Type:
Journal Article
Citation:
Review of financial studies, 1996, 9 (2), pp. 557 - 587
Issue Date:
1996-01
Full metadata record
Files in This Item:
Filename Description Size
Thumbnail2008008279OK.pdf1.34 MB
Adobe PDF
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.
Please use this identifier to cite or link to this item: