Explaining the Cross-Section of Returns via a Multi-Factor APT Model
Journal of Financial and Quantitative Analysis, 1993, vol. 28, issue 3, 331-345
This paper uses an autoregressive approach to test a multi-factor model with time-varying risk premiums. A quasi-differencing approach is used to eliminate the unobservable factors in the model. It is found that the model is capable of capturing the â€œsize effectâ€ and the â€œdividend yield effect,â€ but is incapable of explaining the â€œbook-to-market effectâ€ and the â€œearnings-price ratio effect.â€ Thus, it is concluded that a constant-beta multi-factor model will not be able to explain the cross-sectional variation in expected returns.
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