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Risk and Return in an Equilibrium Apt: Application of a New Test Methodology

64 Pages Posted: 27 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: March 1988

Abstract

We use an asymptotic principal Components technique to estimate pervasive factors influencing asset returns and to test the restrictions imposed by static and intertemporal equilibrium versions of the arbitrage pricing theory (APT) on a multivariate regression model. The empirical techniques allow for fairly arbitrary time variation in risk premiums. We find that the APT provides a better description of the expected returns on assets than the capital asset pricing model (CAPM). However, some statistically reliable mipricing of assets by the APT remains.

Keywords: Asymptotic Principal Components, Arbitrage Pricing Theory, APT, Asset Pricing Model

JEL Classification: G1, G12

Suggested Citation

Connor, Gregory and Korajczyk, Robert A., Risk and Return in an Equilibrium Apt: Application of a New Test Methodology (March 1988). Journal of Financial Economics (JFE), Vol. 21, No. 2, 1988. Available at SSRN: https://ssrn.com/abstract=1917406

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)
+44 702 955-7420 (Fax)

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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