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Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?

80 Pages Posted: 10 Oct 1998 Last revised: 11 Apr 2010

Wayne E. Ferson

University of Southern California; National Bureau of Economic Research (NBER)

Robert A. Korajczyk

Northwestern University - Kellogg School of Management

Abstract

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.

JEL Classification: G13

Suggested Citation

Ferson, Wayne E. and Korajczyk, Robert A., Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?. Journal of Business, Vol. 68, No. 3, July 1995. Available at SSRN: https://ssrn.com/abstract=6320

Wayne E. Ferson (Contact Author)

University of Southern California ( email )

Los Angeles, CA 90089
United States

HOME PAGE: http://www-rcf.usc.edu/~ferson/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert A. Korajczyk

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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