Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?
Wayne E. Ferson
University of Southern California; National Bureau of Economic Research (NBER)
Robert A. Korajczyk
Northwestern University - Kellogg School of Management
Journal of Business, Vol. 68, No. 3, July 1995
This article studies predictability in U.S. stock returns for multiple investment horizons. We measure to what extent predictability is driven by premiums for economy-wide risk factors, comparing two standard methods for factor selection. We study single-beta models and multiple-beta models. We show how to estimate the fraction of the predictability in returns captured by the model, simultaneously with the other parameters. Our analysis indicates that the models capture a large fraction of the predictability for all of the investment horizons. The performances of the principal components and the prespecified-factor approaches are broadly similar.
Number of Pages in PDF File: 80
JEL Classification: G13Accepted Paper Series
Date posted: October 10, 1998 ; Last revised: April 11, 2010
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