Risk and return in an equilibrium APT. Application of a new test methodology

Gregory Connor*, Robert A. Korajczyk

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

257 Scopus citations

Abstract

We use an asymptotic principal components technique to estimate the pervasive factors influencing asset returns and to test the restrictions imposed by static and intertemporal equilibrium versions of the arbitrage pricing theory (APT) on a multivariate regression model. The empirical techniques allow for fairly arbitrary time variation in risk premiums. We find that the APT provides a better description of the expected returns on assets than the capital asset pricing model (CAPM). However, some statistically reliable mispricing of assets by the APT remains.

Original languageEnglish (US)
Pages (from-to)255-289
Number of pages35
JournalJournal of Financial Economics
Volume21
Issue number2
DOIs
StatePublished - Sep 1988

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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