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Operations-Research-Spektrum

, Volume 6, Issue 2, pp 109–117 | Cite as

On tests of the arbitrage pricing theory

  • G. Franke
Theoretical Papers

Summary

In the arbitrage pricing theory, developed by Ross, asset returns are generated by common and residual factors which are not prespecified. This paper shows that exact arbitrage pricing exists in a finite economy if and only if a specific mean-variance efficient portfolio with zero residual variance exists. Zero residual variance is the essential testable implication of the arbitrage pricing theory. Moreover, it is shown that tests of this theory using either principal component analysis or factor analysis to extract factors appear to be strongly biased against the theory.

Keywords

Principal Component Analysis Residual Variance Asset Return Price Theory Extract Factor 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Zusammenfassung

In der von Ross entwickelten Arbitragebewertungstheorie werden die Wertpapierrenditen von gemeinsamen und individuellen Faktoren erzeugt, die vorab nicht spezifiziert werden. Es wird gezeigt, daß eine exakte Arbitragebewertung bei endlich vielen Wertpapieren genau dann besteht, wenn ein bestimmtes (μ,σ)-effizientes Portefeuille ohne unsystematisches Risiko existiert. Dies ist die wesentliche testbare Implikation der Arbitragebewertungstheorie. Außerdem wird gezeigt, daß Tests, soweit sie die Hauptkomponentenmethode oder die Faktorenanalyse verwenden, einen erheblichen Bias gegen die Theorie aufweisen.

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Copyright information

© Springer-Verlag 1984

Authors and Affiliations

  • G. Franke
    • 1
  1. 1.Fakultät für Wirtschaftswissenschaften und StatistikUniversität KonstanzKonstanz 1Deutschland

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