Do Assumptions About Factor Structure Matter in Empirical Tests of the APT?
"The effect of assumptions about factor structure on empirical tests of multifactor models such as the Arbitrage Pricing Policy Theory has received little attention in the literature. Using data on securities traded on the London Stock Exchange, we examine whether returns are best described by an approximate factor structure and whether assumptions about correlations across idiosyncratic returns have a significant impact on estimated prices of risk and their significance. Our findings suggest that returns are best described by an approximate factor structure and, if this is taken into account when empirically testing the APT, six factors carry significant prices of risk. However, if a strict factor structure is imposed, no factors carry significant prices of risk. These findings suggest that assumptions about factor structure matter in empirically testing the APT." Copyright Blackwell Publishers Ltd 1997.
Year of publication: |
1997-03
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Authors: | Garrett, Ian ; Priestley, Richard |
Published in: |
Journal of Business Finance & Accounting. - Wiley Blackwell, ISSN 0306-686X. - Vol. 24.1997-03, 2, p. 249-260
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Publisher: |
Wiley Blackwell |
Saved in:
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