Performance Measurement with the Arbitrage Pricing Theory: A New Framework for Analysis

38 Pages Posted: 26 Aug 2011  

Gregory Connor

London School of Economics & Political Science (LSE) - Department of Accounting and Finance

Robert A. Korajczyk

Northwestern University - Kellogg School of Management

Date Written: April 1985

Abstract

This paper develops a theory and econometric method of portfolio performance measurement using a competitive equilibrium version of the Arbitrage Pricing Theory. We show that the Jensen coefficient and the appraisal ratio of Treynor and Black are theoretically compatible with the Arbitrage Pricing Theory. We construct estimators for the two performance measures using a new principal components technique, and describe their asymptotic distributions. The estimators are computationally feasible using a large number of securities. We also suggest a new approach to testing for the correct number of factors.

Keywords: Asymptotic Principal Components, Arbitrage Pricing Theory, APT, Performance Measurement, Jensen Measure, Appraisal Ratio

JEL Classification: G1, G12

Suggested Citation

Connor, Gregory and Korajczyk, Robert A., Performance Measurement with the Arbitrage Pricing Theory: A New Framework for Analysis (April 1985). Journal of Financial Economics (JFE), Vol. 15, No. 3, 1986. Available at SSRN: https://ssrn.com/abstract=1916918

Gregory Connor

London School of Economics & Political Science (LSE) - Department of Accounting and Finance ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 702 955-6407 (Phone)
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Robert A. Korajczyk (Contact Author)

Northwestern University - Kellogg School of Management ( email )

Kellogg School of Management
2211 Campus Drive, Room 4357
Evanston, IL 60208
United States
847-491-8336 (Phone)
847-491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/korajczyk_robert.aspx#research

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