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Author: | Al-Najjar, N. I. |
Title: | Factor analysis and arbitrage pricing in large asset economies |
Journal: | Journal of Economic Theory
1998 : FEB, VOL. 78:2, p. 231-262 |
Index terms: | ARBITRAGE PRICING THEORY ASSETS |
Language: | eng |
Abstract: | The paper presents a development of a framework for factor analysis and arbitrage pricing in a large asset economy modelled as one with a continuum of assets. It is shown that the assumptions of absence of arbitrage opportunities and that returns have a strict factor structure imply exact factor-pricing for a full measure of assets. Interpreting finite subsets of assets as random draws from the underlying economy, there is probability one that every asset in a finite sample is exactly factor-priced. It is further shown that approximate factor structures exist in general and that they can be chosen optimally according to a measure of their explanatory power. Factor structures in the present model are also robust to asset repackaging and to the use of proxies to approximate the true factors. |
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