Estimating Pervasive Economic Factors with Missing Observations
35 Pages Posted: 18 Sep 2008
Date Written: April 1987
We suggest a technique for estimating pervasive economic factors which allows the use of all available security return data. The resulting factor estimates can be used in applications and tests of the Arbitrage Pricing Theory (APT). An obvious advantage of the technique is that more precise estimates of the factors are obtained while avoiding potential survivorship biases in factor construction. Empirically, the factor estimates using the entire data set outperform (in terms of asset pricing) estimates using only continuously traded assets.
Keywords: Factor Models, Arbitrage Pricing Theory
JEL Classification: G10, G12
Suggested Citation: Suggested Citation