Explaining the Cross-Section of Returns via a Multi-Factor APT Model

Jianping Mei

Journal of Financial and Quantitative Analysis, 1993, vol. 28, issue 3, 331-345

Abstract: 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 “size effect” and the “dividend yield effect,” but is incapable of explaining the “book-to-market effect” and the “earnings-price ratio effect.” Thus, it is concluded that a constant-beta multi-factor model will not be able to explain the cross-sectional variation in expected returns.

Date: 1993
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