The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Arbitrage Pricing Theory

  • Gur Huberman
  • Zhenyu Wang
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_374

Abstract

Focusing on asset returns governed by a factor structure, the 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 contradicts 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 Arbitrage pricing theory Arrow–Debreu security pricing Asset allocation Asset pricing Black–Scholes model Capital asset pricing model Cost of capital Factor models Generalized method of moments Hilbert space techniques Mean- variance efficiency Portfolio analysis Stochastic discount factor 

JEL Classifications

G12 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Gur Huberman
    • 1
  • Zhenyu Wang
    • 1
  1. 1.