Multifactor Models and Their Consistency with the APT

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

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