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Behavioral approach to Arbitrage Pricing Theory

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  • Hasan, M.Emrul

Abstract

In this paper, I have examined the relation between expected returns and measures of systematic risk stemming from macroeconomic factors studied by Chen, Roll and Ross (1986, hereafter CRR) for a different time period (1978-2007) and different formation of portfolios (based on ME and BE/ME). Like CRR, I’ve used a version of Fama and MacBeth’s (1973) two-pass cross-sectional regression (CSR) methodology. Apparently, changing the time period and formation of portfolio lead to noticeably different conclusions. Using the same macrofactors as CRR only factor related to the change in expected inflation (DEI) is significantly priced in the overall period. The sample mean of the Industrial production factor (MP), a highly significant factor in CRR, is insignificant, although positive, for this period. Adding a sixth factor that captures the investor’s confidence in the market is quite insensitive to other marcofactors. However, both the five factor by CRR and proposed six factor model show evidence of joint significance, which is a new property entered in this paper.

Suggested Citation

  • Hasan, M.Emrul, 2010. "Behavioral approach to Arbitrage Pricing Theory," MPRA Paper 26343, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:26343
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Asset pricing; APT; Macro factors; Multifactor; Confidence;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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