An asset-pricing theory unifying the CAPM and APT

Article Abstract:

This study shows that the competitive-equilibrium version of the APT may be extended to develop an exact model if idiosyncratic risks obey the Ross separating distribution. The results indicate that one only need add the market portfolio as an extra factor to the factor model in order to obtain an exact asset-pricing relation. Thus, this study presents an extension aNd integration of the CAPM and APT. The "empirical" APT is also generalized to allow for some factors to be omitted from the econometric model employed to test the theory. The developed model is extremely robust and may be reduced to the CAPM or expanded to approximate Ross's APT depending upon the number of omitted factors. Further, the importance of the market portfolio is shown to be a monotonic increasing function of the number of omitted factors. Finally, the study demonstrates, in a finite economy, the pricing-error bound of the Ross APT in a correlated-residuals factor structure is an increasing function of the absolute value of market-residual beta, rather than the weight of the asset in the market portfolio as is the case of uncorrelated factor residuals. However, under the normality assumption, the pricing error becomes an extra component related to the market-portfolio factor, and the exact asset-pricing relation is once again obtained. (Reprinted by permission of the publisher.)

Prices and rates, Assets (Accounting)

---

Temporal aggregation and the continuous-time capital asset pricing model

Article Abstract:

We examine how the empirical implications of the Capital Asset Pricing Model (CAPM) are affected by the length of the period over which returns are measured. We show that the continuous-time CAPM becomes a multifactor model when the asset pricing relation is aggregated temporally. We use Hansen's Generalized Method of Moments (GMM) approach to test the continuous-time CAPM at an unconditional level using size portfolio returns. The results indicate that the continuous-time CAPM cannot be rejected. In contrast, the discrete-time CAPM is easily rejected by the tests. These results have a number of important implications for the interpretation of tests of the CAPM which have appeared in the literature. (Reprinted by permission of the publisher.)

Models, Finance

---

The implications of nonmarketable income for consumption-based models of asset pricing

Article Abstract:

A new representation of nonmarketable (NM) income is introduced in this essay. Using this representation and continuous trading, three exists a set of individuals who do not participate in the asset market and who consume at the rate of nonmarketable income derived from human capital. Because these individuals remain nonparticipants for a range of stochastic processes governing the NM income, consumption betas are not generally unique in value and the consumption-based CAPM (CCAPM) does not obtain. However, the intertemporal CAPM (ICAPM) of Merton remains valid. (Reprinted by permission of the publisher.)

Stock-exchange, Stock exchanges, Statistics

Similar abstracts:

• Abstracts: Empirical tests of the consumption-oriented CAPM. (consumption-oriented capital asset price model). A utility-based model of common stock price movements
• Abstracts: The filling in the training sandwich. Guideline on education and training requirements for accounting technicians
• Abstracts: An empirical test of the resource-based theory: strategic regulation in the Dutch audit industry. Corporate diversity and economic performance: the impact of market specialization
• Abstracts: International portfolio investment flows. Estimation and test of a simple model of intertemporal capital asset pricing
• Abstracts: Start-up, organizational, and syndication costs in public sales. Tax focus on America's aging population

This website is not affiliated with document authors or copyright owners. This page is provided for informational purposes only. Unintentional errors are possible.