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The Incompleteness Problem of the APT Model
Jönköping University.ORCID iD: 0000-0002-3623-5034
2011 (English)In: Computational Economics, ISSN 0927-7099, E-ISSN 1572-9974, Vol. 38, no 2, p. 129-151Article in journal (Refereed) Published
Abstract [en]

The Arbitrage Pricing Theory provides a theory to quantify risk and thereward for taking it. While the theory itself is sound from most perspectives, its empirical version is connected with several shortcomings. One extremely delicate problemarises because the set of observable asset returns rarely has a history of complete observations. Traditionally, this problem has been solved by simply excluding assets withouta complete set of observations from the analysis. Unfortunately, such a methodologymay be shown to (i) lead for any fixed time period to selection bias in that only thelargest companies will remain and (ii) lead to an asymptotically empty set containingno observations at all. This paper discusses some possible solutions to this problemand also provides a case study containing Swedish OMX data for demonstration.

Place, publisher, year, edition, pages
2011. Vol. 38, no 2, p. 129-151
Keywords [en]
APT, Principal components, Asymptotics, Bias, High-dimensional data
National Category
Probability Theory and Statistics
Research subject
Statistics/Econometrics
Identifiers
URN: urn:nbn:se:lnu:diva-48828DOI: 10.1007/s10614-011-9255-1OAI: oai:DiVA.org:lnu-48828DiVA, id: diva2:894549
Available from: 2016-01-15 Created: 2016-01-15 Last updated: 2017-04-18Bibliographically approved

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Karlsson, Peter S.

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