Measuring the pricing error of the arbitrage pricing theory

John Geweke and Guofu Zhou

No 189, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper provides an exact Bayesian framework for analyzing the arbitrage pricing theory (APT). Based on the Gibbs sampler, we show how to obtain the exact posterior distributions for functions of interest in the factor model. In particular, we propose a measure of the APT pricing deviations and obtain its exact posterior distribution. Using monthly portfolio returns grouped by industry and market capitalization, we find that there is little improvement in reducing the pricing errors by including more factors beyond the first one.

Keywords: Arbitrage; Prices (search for similar items in EconPapers)
Date: 1995
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Measuring the Pricing Error of the Arbitrage Pricing Theory (1996)
Working Paper: Measuring the Pricing Error of the Arbitrage Pricing Theory (1996)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:189

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