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Multifactor models do not explain deviations from the CAPM

Article Abstract:

A study was conducted on the Sharpe-Lintner capital asset pricing model (CAPM). Risk-based and nonrisk-based alternatives were analyzed to explain contradictions observed in CAPM. Results showed that CAPM deviations caused by missing factors are difficult to detect since expected return deviations are followed by increased variance. The importance of economic analysis in differentiating pricing models for risk-return relationships was underscored.

Research, Capital assets pricing model, Capital asset pricing model

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Factor Pricing in a Finite Economy

Article Abstract:

A factor pricing equation is provided to describe price deviation in the Arbitrage Pricing Theory model. Deviation is found to be small in a finite economy. A good approximation for the mean return of all traded assets is achieved.

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An Explicit Bound on Individual Assets' Deviations from APT Pricing in a Finite Economy

Article Abstract:

The arbitrage pricing theory (APT) is simplified in a model of a finite economy. An explicit bound on ADP deviations is provided for prices across assets. Theoretical deviations are found to be neglible.

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