Arbitrage Pricing Theory

20 Pages Posted: 1 Sep 2005 Last revised: 4 Apr 2022

See all articles by Gur Huberman

Gur Huberman

Columbia University - Columbia Business School, Finance

Zhenyu Wang

Indiana University, Kelley School of Business

Abstract

Focusing on capital asset returns governed by a factor structure, the Arbitrage Pricing Theory (APT) is a one-period model, in which preclusion of arbitrage over static portfolios of these assets leads to a linear relation between the expected return and its covariance with the factors. The APT, however, does not preclude arbitrage over dynamic portfolios. Consequently, applying the model to evaluate managed portfolios is contradictory to the no-arbitrage spirit of the model. An empirical test of the APT entails a procedure to identify features of the underlying factor structure rather than merely a collection of mean-variance efficient factor portfolios that satisfies the linear relation.


Keywords: arbitrage, asset pricing model, factor model

JEL Classification: G12

Suggested Citation

Huberman, Gur and Wang, Zhenyu, Arbitrage Pricing Theory. Staff Report No. 216, Available at SSRN: https://ssrn.com/abstract=796089

Gur Huberman (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Zhenyu Wang

Indiana University, Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

HOME PAGE: http://www.kelley.iu.edu/Finance/Faculty/page12594.cfm?ID=37555

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