The Small Noise Arbitrage Pricing Theory

Steve Satchell
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Steve Satchell: University of Cambridge

No 4, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper presents a small-noise version of the Arbitrage Pricing Theory (APT) which allows us to interpret the approximate linearity of the risk premia in terms of factor exposures for a fixed number of assets. The approximation becomes more accurate as the noise of the system decreases, even though the number of assets stays fixed.

Keywords: arbitrage pricing theory; linear factor models (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 7 pages
Date: 1999-04-01
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