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Uncertainty and the arbitrage pricing theory

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  • Barbara McKiernan

Abstract

This paper tests the economic importance of income uncertainty in the context of a measured factor arbitrage pricing theory model. This provides a test of the importance of uncertainty using a different methodology and data set than are traditionally used. If income uncertainty affects the investment climate, a statistically significant risk premium will be associated with assets that are affected by uncertainty. The empirical work in this essay finds that a generalized autoregressive conditional heteroskedasticity measure of income uncertainty is a priced factor in a model of the arbitrage pricing theory. The risk premium between a baa-rated 10-year corporate bond and a 10-year government bond, as well as the term structure, also are priced factors. Copyright International Atlantic Economic Society 1997

Suggested Citation

  • Barbara McKiernan, 1997. "Uncertainty and the arbitrage pricing theory," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 25(3), pages 307-311, September.
    • Handle: RePEc:kap:atlecj:v:25:y:1997:i:3:p:307-311
    DOI: 10.1007/BF02298412
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