Arbitrage Pricing Theory as a Restricted Nonlinear Multivariate Regression Model Iterated Nonlinear Seemingly Unrelated Regression Estimates
Year: 1988
Type: article
Abstract: By replacing the unknown random factors of factor analysis with observed macroeconomic variables, the arbitrage pricing theory (APT) is recast as a multivariate nonlinear regression model with across-equation restrictions. An explicit theoretical justification for the inclusion of an arbitrary, well-diversified market index is given. Using monthly returns on 70 stocks, iterated nonlinear seemingly unrelated regression techniques are employed to obtain joint estimates of asset sensitivities and their associated APT risk “prices.” Without the assumption of normally distributed errors, these estimators are strongly consistent and asymptotically normal. With the additional assumption of normal errors, they are also full-information maximum likelihood estimators. Classical asymptotic nonlinear nested hypothesis tests are supportive of the APT with measured macroeconomic factors.
Authors: Marjorie B. McElroy, Edwin Burmeister
Institution: Duke University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2004200995