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Multifactor Models and Their Consistency with the APT

Cooper, Ilan; Ma, Liang; Maio, Paulo; Philip, Dennis

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Authors

Ilan Cooper

Liang Ma

Paulo Maio



Abstract

We examine the consistency of several prominent multifactor models from the empirical asset pricing literature with the arbitrage pricing theory (APT) framework. We follow the APT-related literature and estimate the common factor structure from a rich cross-section (associated with 42 major CAPM anomalies) by employing the asymptotic principal components method. Our benchmark model contains six statistical factors and clearly dominates, in both economic and statistical terms, most of the empirical multifactor models proposed in the literature by a good margin. These results represent a critical challenge to the current workhorse models in terms of explaining large-scale equity risk premiums.

Citation

Cooper, I., Ma, L., Maio, P., & Philip, D. (2021). Multifactor Models and Their Consistency with the APT. The Review of Asset Pricing Studies, 11(2), 402-444. https://doi.org/10.1093/rapstu/raaa024

Journal Article Type Article
Acceptance Date Oct 20, 2020
Online Publication Date Dec 26, 2020
Publication Date 2021-06
Deposit Date Oct 20, 2020
Publicly Available Date Dec 26, 2022
Journal Review of Asset Pricing Studies
Print ISSN 2045-9920
Electronic ISSN 2045-9939
Publisher Society for Financial Studies
Peer Reviewed Peer Reviewed
Volume 11
Issue 2
Pages 402-444
DOI https://doi.org/10.1093/rapstu/raaa024
Public URL https://durham-repository.worktribe.com/output/1253538

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Copyright Statement
This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of asset pricing studies following peer review. The version of record Cooper, Ilan, Ma, Liang, Maio Paulo & Philip, Dennis (2021). Multifactor Models and Their Consistency with the APT. Review of Asset Pricing Studies 11(2): 402-444.] is available online at: https://doi.org/10.1093/rapstu/raaa024.





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