Some Empirical Tests of the Theory of Arbitrage Pricing



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    • Graduate School of Business, University of Chicago. I thank my dissertation committee chairman, Richard Roll, for his guidance and encouragement; Eugene Fama for his suggestions; and Glenn Graves for his assistance in the mathematical programmings. I have also benefited from the comments of Armen Alchian, George Constantinides, Tom Copeland, Robert Geske, Jack Hirshleifer, Robert Hamada, Herb Johnson, Edward Leamer, Robert Litzenberger, David Mayers, Merton Miller, Marc Reinganum, Fred Weston, Arnold Zellner, and especially Stephen Brown and Michael Gibbons. This research was partially supported by the Research Program in Competition and Business Policy at the University of California, Los Angeles, and a University of California, Santa Barbara Academic Senate grant 8–581557–07427–7.


We estimate the parameters of Ross's Arbitrage Pricing Theory (APT). Using daily return data during the 1963–78 period, we compare the evidence on the APT and the Capital Asset Pricing Model (CAPM) as implemented by market indices and find that the APT performs well. The theory is further supported in that estimated expected returns depend on estimated factor loadings, and variables such as own variance and firm size do not contribute additional explanatory power to that of the factor loadings.