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Explaining the Cross-Section of Returns via a Multi-Factor APT Model

Published online by Cambridge University Press:  06 April 2009

Jianping Mei
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Abstract

This paper uses an autoregressive approach to test a multi-factor model with time-varying risk premiums. A quasi-differencing approach is used to eliminate the unobservable factors in the model. It is found that the model is capable of capturing the “size effect” and the “dividend yield effect,” but is incapable of explaining the “book-to-market effect” and the “earnings-price ratio effect.” Thus, it is concluded that a constant-beta multi-factor model will not be able to explain the cross-sectional variation in expected returns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 28 , Issue 3 , September 1993 , pp. 331 - 345
Copyright
Copyright © School of Business Administration, University of Washington 1993

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