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2023 | OriginalPaper | Chapter

7. The Arbitrage Pricing Theory Model

Authors : James W. Kolari, Seppo Pynnönen

Published in: Investment Valuation and Asset Pricing

Publisher: Springer International Publishing

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Abstract

One of the most controversial assumptions of the CAPM is that returns are normally distributed, which implies that agents have quadratic utility functions. This assumption guarantees the mean-variance efficiency of the market portfolio. Also, it leads to a linear equilibrium relation between the expected return on an asset and its sensitivity to the expected market premium (i.e., beta risk). Using this linear relation, Ross (1971, 1974, 1976) developed the arbitrage pricing theory (APT). Based on no-arbitrage conditions, the APT is a more general asset pricing model than the CAPM.

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previous chapter Alternative CAPM Specifications
next chapter Multifactor Models
Appendix
Available only for authorised users
Footnotes
1
See also Huberman (1982).
 
2
See also Ingersoll (1984) for a generalization of this approach.
 
3
For example, see Miller and Scholes (1972).
 
Literature
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Connor, G., and R. Korjzyck. 1986. Performance measurement with the arbitrage pricing theory. Journal of Financial Economics 15: 373–394.CrossRef
Dhrymes, P., I. Friend, and N.B. Gultekin. 1984. A critical reexamination of the empirical evidence on the arbitrage pricing theory. Journal of Finance 39: 703–738.CrossRef
Dybvig, P., and S.A. Ross. 1985. Yes, the APT is testable. Journal of Finance 40: 1173–1188.CrossRef
Fama, E.F., and J.D. MacBeth. 1973. Risk, return, and equilibrium: Empirical tests. Journal of Political Economy 38: 607–636.CrossRef
Huberman, G. 1982. A simple approach to arbitrage pricing theory. Journal of Economic Theory 28: 183–191.CrossRef
Huberman, G., and Z. Wang. 2017. Arbitrage pricing theory. In The New Palgrave Dictionary of Economics, ed. M. Vernengo, E.P. Caldentey, and B.J. Rosser Jr. London, UK: Palgrave Macmillan.
Ingersoll, J.E. 1984. Some results in the theory of arbitrage pricing. Journal of Finance 39: 1021–1039.CrossRef
Miller, M.H., and M. Scholes. 1972. Rates of return in relation to risk: A re-examination of recent findings. In Studies in the Theory of Capital Markets, ed. M.C. Jensen. New York, NY: Praeger.
Roll, R., and S.A. Ross. 1980. An empirical investigation of the arbitrage pricing theory. Journal of Finance 35: 1073–1103.CrossRef
Ross, S.A. 1971. The general validity of the mean variance approach in large markets. Discussion paper no. 12–72. Rodney L, White Center for Financial Research, University of Pennsylvania.
Ross, S.A. 1974. Return, risk, and arbitrage. In Risk and Return in Finance, ed. I. Friend and J. Bicksler. New York, NY: Heath Lexington.
Ross, S.A. 1976. The arbitrage theory of capital asset pricing. Journal of Economic Theory 13: 341–360.CrossRef
Shanken, J. 1982. The arbitrage pricing theory: Is it testable? Journal of Finance 37: 1129–1140.CrossRef
Metadata
Title
The Arbitrage Pricing Theory Model
Authors
James W. Kolari
Seppo Pynnönen
Copyright Year
2023
Book
Investment Valuation and Asset Pricing

Print ISBN: 978-3-031-16783-6

Electronic ISBN: 978-3-031-16784-3

Copyright Year: 2023

DOI
https://doi.org/10.1007/978-3-031-16784-3_7