THE MAGNITUDE OF PRICING ERRORS IN THE ARBITRAGE PRICING THEORY

Ashok Robin, Ravi Shukla

Research output: Contribution to journalArticle

4 Scopus citations

Abstract

In this paper the arbitrage pricing theory (APT) pricing errors for individual securities are estimated employing maximum likelihood factor analysis and Fama‐MacBeth style aggregation. Results show that the pricing errors are large and statistically significant and that there is a high degree of variability in pricing errors across securities. This evidence contradicts the prevailing APT intuition that the pricing errors can be ignored as negligible. Pricing errors are also found to be related to residual variance and firm size.

Original languageEnglish (US)
Pages (from-to)65-82
Number of pages18
JournalJournal of Financial Research
Volume14
Issue number1
DOIs
StatePublished - Jan 1 1991
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance

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