An Empirical Investigation of the Arbitrage Pricing Theory

An Empirical Investigation of the Arbitrage Pricing Theory

  • RICHARD ROLL
  • STEPHEN A. ROSS

Article first published online: 30th April 2012 DOI: 10.1111/j.1540-6261.1980.tb02197.x

Abstract


Empirical tests are reported for Ross' [48] arbitrage theory of asset pricing. Using data for individual equities during the 1962–72 period, at least three and probably four priced factors are found in the generating process of returns. The theory is supported in that estimated expected returns depend on estimated factor loadings, and variables such as the own standard deviation, though highly correlated (simply) with estimated expected returns, do not add any further explanatory power to that of the factor loadings.

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