Notes on Dynamic Factor Pricing Models

Bruce N. Lehmann

No 3677, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: These notes discuss three aspects of dynamic factor pricing (i.e., APT) models. The first one is that diversifiable idiosyncratic risk is unpredictable in a no-arbitrage world. The second feature is that the conditional factor loadings or betas on the common factors are approximately constant when returns follow an unconditional factor structure. The third topic concerns the estimation of dynamic factor pricing models in large cross-sections when returns follow an unconditional factor structure. These results aid in the interpretation of existing applications and identify some of the issues in the formulation and estimation of dynamic factor pricing models.

Date: 1991-04
Note: ME
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Citations: View citations in EconPapers (2)

Published as Review of Quantitative Finance and Accounting, Vol. 2, No. 1, pp. 69-87, (March 1992).

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