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The Small Noise Arbitrage Pricing Theory

Author

Listed:
  • Steve Satchell

    (University of Cambridge)

Abstract

This paper presents a small-noise version of the Arbitrage Pricing Theory (APT) which allows us to interpret the approximate linearity of the risk premia in terms of factor exposures for a fixed number of assets. The approximation becomes more accurate as the noise of the system decreases, even though the number of assets stays fixed.

Suggested Citation

  • Steve Satchell, 1999. "The Small Noise Arbitrage Pricing Theory," Research Paper Series 4, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:4
    as

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    File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp4.pdf
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    References listed on IDEAS

    as
    1. Bansal, Ravi & Viswanathan, S, 1993. "No Arbitrage and Arbitrage Pricing: A New Approach," Journal of Finance, American Finance Association, vol. 48(4), pages 1231-1262, September.
    2. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    3. Gur Huberman, 2005. "A Simple Approach to Arbitrage Pricing Theory," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 9, pages 289-308, World Scientific Publishing Co. Pte. Ltd..
    4. Chamberlain, Gary & Rothschild, Michael, 1983. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," Econometrica, Econometric Society, vol. 51(5), pages 1281-1304, September.
    5. Huberman, Gur & Kandel, Shmuel, 1987. "Mean-Variance Spanning," Journal of Finance, American Finance Association, vol. 42(4), pages 873-888, September.
    6. Connor, Gregory, 1984. "A unified beta pricing theory," Journal of Economic Theory, Elsevier, vol. 34(1), pages 13-31, October.
    7. Kadane, Joseph B, 1971. "Comparison of k-Class Estimators when the Disturbances are Small," Econometrica, Econometric Society, vol. 39(5), pages 723-737, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    arbitrage pricing theory; linear factor models;

    JEL classification:

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

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