Some Tests of APT Mispricing Using Mimicking Portfolios

Lawrence Kryzanowski, Simon Lalancette and Minh Chau To

The Financial Review, 1994, vol. 29, issue 2, 153-92

Abstract: Cross-sectional and time-series tests using mimicking portfolios are used to assess the exactness of the APT with(out) a residual market factor. The first factor seems to be sufficient to span the efficient set, whether the model is estimated using (un)conditional variance-co-variance matrices that are (un)adjusted for nonsynchronous trading. Although the conditional standard deviations of the mimicking portfolios significantly explain the time-variability of security volatilities, the residuals of the mean equation still exhibit heteroskedasticity. Similar results are obtained for portfolios of CAPM-beta-ranked securities, and for randomly selected individual securities. Copyright 1994 by MIT Press.

Date: 1994
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