Measuring the Pricing Error of the Arbitrage Pricing Theory

Geweke, J; Zhou, G

Measuring the Pricing Error of the Arbitrage Pricing Theory

Geweke, J Zhou, G

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Publication Type:: Journal Article
Citation:: Review of Financial Studies, 1996, 9 (2), pp. 557 - 587
Issue Date:: 1996-01-01

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Field	Value	Language
dc.contributor.author	Geweke, J	en_US
dc.contributor.author	Zhou, G	en_US
dc.date.issued	1996-01-01	en_US
dc.identifier.citation	Review of Financial Studies, 1996, 9 (2), pp. 557 - 587	en_US
dc.identifier.issn	0893-9454	en_US
dc.identifier.uri	http://hdl.handle.net/10453/9994
dc.description.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.	en_US
dc.relation.ispartof	Review of Financial Studies	en_US
dc.relation.isbasedon	10.1093/rfs/9.2.557	en_US
dc.subject.classification	Finance	en_US
dc.title	Measuring the Pricing Error of the Arbitrage Pricing Theory	en_US
dc.type	Journal Article
utslib.citation.volume	2	en_US
utslib.citation.volume	9	en_US
utslib.for	140207 Financial Economics	en_US
utslib.for	1401 Economic Theory	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Economics Discipline
utslib.copyright.status	closed_access
pubs.issue	2	en_US
pubs.publication-status	Published	en_US
pubs.volume	9	en_US

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.

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http://hdl.handle.net/10453/9994