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Arbitrage Pricing Theory

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The New Palgrave Dictionary of Economics

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Abstract

The arbitrage pricing theory (APT) was developed primarily by Ross (1976a; 1976b). It is a one-period model in which every investor believes that the stochastic properties of returns of capital assets are consistent with a factor structure. Ross argues that, if equilibrium prices offer no arbitrage opportunities over static portfolios of the assets, then the expected returns on the assets are approximately linearly related to the factor loadings. (The factor loadings, or betas, are proportional to the returns’ covariances with the factors.) The result is stated in section 1.

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Authors
  1. Gur Huberman
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  2. Zhenyu Wang
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Editor information

Steven N. Durlauf Lawrence E. Blume

Copyright information

© 2008 Palgrave Macmillan, a division of Macmillan Publishers Limited

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Huberman, G., Wang, Z. (2008). Arbitrage Pricing Theory. In: Durlauf, S.N., Blume, L.E. (eds) The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-58802-2_53

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  • DOI: https://doi.org/10.1007/978-1-349-58802-2_53

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  • Publisher Name: Palgrave Macmillan, London

  • Print ISBN: 978-0-333-78676-5

  • Online ISBN: 978-1-349-58802-2

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