Measuring the Pricing Error of the Arbitrage Pricing Theory
نویسنده
چکیده
This article provides an exact Bayesian frame work for analyzing the arbitrage pricing the ory (APT). Based on the Gibbs sampler, we show how to obtain the exact posterior distributions for functions of interest in the factor modeL In particular, we propose a measure of the APT pricing deviations and obtain its exact posterior distribution. Using monthly portfolio returns grouped by industry and market capitalization, we find that there is little improvement in reduc ing the pricing errors by including more factors beyond the first one.
منابع مشابه
Ambiguity Theory and Asset Pricing: Empirical Evidence from Tehran Stock Exchange
Modern portfolio theory is based on the relationship between risk and return and in this paper, specific uncertainty conditions are introduced as ambiguity which affects the asset pricing. Also, the relationship between risk, ambiguity and return is examined. First, ambiguity is estimated by the means of three-variable and main component method, trading volume, ask-bid spread, error of earnings...
متن کاملVirtual Arbitrage Pricing Theory
We generalize the Arbitrage Pricing Theory (APT) to include the contribution of virtual arbitrage opportunities. We model the arbitrage return by a stochastic process. The latter is incorporated in the APT framework to calculate the correction to the APT due to the virtual arbitrage opportunities. The resulting relations reduce to the APT for an infinitely fast market reaction or in the case wh...
متن کاملEmpirical Evaluation of Asset Pricing Models: Arbitrage and Pricing Errors in Contingent Claims
Hansen and Jagannathan (1997) have developed two measures of pricing errors for asset pricing models: the maximum pricing error in all static portfolios of the test assets and the maximum pricing error in all contingent claims of the assets. In this paper, we develop simulation-based Bayesian inference for these measures. While the literature reports that the time-varying extensions substantial...
متن کاملCooperative network flow problem with pricing decisions and allocation of benefits: A game theory approach
Several real problems in telecommunication, transportation, and distribution industries can be well analyzed by network flow models. In revenue management, pricing plays a primary role which increases the profit generated from a limited supply of assets. Pricing decision directly affects the amount of service or product demand. Hence, in traditional maximum flow problem, we assume that the dema...
متن کاملValuation of installment option by penalty method
In this paper, installment options on the underlying asset which evolves according to Black-Scholes model and pays constant dividend to its owner will be considered. Applying arbitrage pricing theory, the non-homogeneous parabolic partial differential equation governing the value of installment option is derived. Then, penalty method is used to value the European continuous installment call opt...
متن کامل