The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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A Critical Reexamination of the Empirical Evidence on the Arbitrage Pricing Theory
Published: 06/01/1984 | DOI: 10.1111/j.1540-6261.1984.tb02312.x
PHOEBUS J. DHRYMES, IRWIN FRIEND, N. BULENT GULTEKIN
This paper demonstrates that the Roll and Ross (RR) and other previously published tests of the APT are subject to several basic limitations. There is a general nonequivalence of factor analyzing small groups of securities and factor analyzing a group of securities sufficiently large for the APT model to hold. It is found that as one increases the number of securities, the number of “factors” determined increases. This increase in the number of “factors” with larger groups of securities cannot readily be explained by a distinction between “priced” and “nonpriced” risk factors as it is impermissible to carry out tests on whether a given “risk factor is priced” using factor analytic procedures.
New Tests of the APT and Their Implications
Published: 07/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb04988.x
PHOEBUS J. DHRYMES, IRWIN FRIEND, MUSTAFA N. GULTEKIN, N. BULENT GULTEKIN
This paper provides new tests of the arbitrage pricing theory (APT). Test results appear to be extremely sensitive to the number of securities used in the two stages of the tests of the APT model. New tests also indicate that unique risk is fully as important as common risk. While these tests have serious limitations, they are inconsistent with the APT.