Posterior, predictive, and utility-based approaches to testing the arbitrage pricing theory

Robert McCulloch, Peter E. Rossi

Research output: Contribution to journalArticle

43 Citations (Scopus)

Abstract

To provide a framework for judging the economic significance of departures from the arbitrage pricing theory, we adopt a utility-based metric based on optimal portfolio choices. This measure is examined using both predictive and posterior analysis. Our predictive analysis shows very large and economically significant departures from the model restrictions. However, the high level of parameter uncertainty suggests that we cannot conclusively either affirm or reject the APT. Our conclusions differ markedly from other studies which employ traditional significance-testing procedures and, in many instances, fail to reject the APT restrictions.

Original languageEnglish (US)
Pages (from-to)7-38
Number of pages32
JournalJournal of Financial Economics
Volume28
Issue number1-2
DOIs
StatePublished - 1990
Externally publishedYes

Fingerprint

Arbitrage pricing theory
Testing
Optimal portfolio choice
Parameter uncertainty
Economic significance

ASJC Scopus subject areas

  • Accounting
  • Strategy and Management
  • Economics and Econometrics
  • Finance

Cite this

Posterior, predictive, and utility-based approaches to testing the arbitrage pricing theory. / McCulloch, Robert; Rossi, Peter E.

In: Journal of Financial Economics, Vol. 28, No. 1-2, 1990, p. 7-38.

Research output: Contribution to journalArticle

@article{aaa4a025f7bd4e2481418f25a6a3337a,
title = "Posterior, predictive, and utility-based approaches to testing the arbitrage pricing theory",
abstract = "To provide a framework for judging the economic significance of departures from the arbitrage pricing theory, we adopt a utility-based metric based on optimal portfolio choices. This measure is examined using both predictive and posterior analysis. Our predictive analysis shows very large and economically significant departures from the model restrictions. However, the high level of parameter uncertainty suggests that we cannot conclusively either affirm or reject the APT. Our conclusions differ markedly from other studies which employ traditional significance-testing procedures and, in many instances, fail to reject the APT restrictions.",
author = "Robert McCulloch and Rossi, {Peter E.}",
year = "1990",
doi = "10.1016/0304-405X(90)90046-3",
language = "English (US)",
volume = "28",
pages = "7--38",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier",
number = "1-2",

}

TY - JOUR

T1 - Posterior, predictive, and utility-based approaches to testing the arbitrage pricing theory

AU - McCulloch, Robert

AU - Rossi, Peter E.

PY - 1990

Y1 - 1990

N2 - To provide a framework for judging the economic significance of departures from the arbitrage pricing theory, we adopt a utility-based metric based on optimal portfolio choices. This measure is examined using both predictive and posterior analysis. Our predictive analysis shows very large and economically significant departures from the model restrictions. However, the high level of parameter uncertainty suggests that we cannot conclusively either affirm or reject the APT. Our conclusions differ markedly from other studies which employ traditional significance-testing procedures and, in many instances, fail to reject the APT restrictions.

AB - To provide a framework for judging the economic significance of departures from the arbitrage pricing theory, we adopt a utility-based metric based on optimal portfolio choices. This measure is examined using both predictive and posterior analysis. Our predictive analysis shows very large and economically significant departures from the model restrictions. However, the high level of parameter uncertainty suggests that we cannot conclusively either affirm or reject the APT. Our conclusions differ markedly from other studies which employ traditional significance-testing procedures and, in many instances, fail to reject the APT restrictions.

UR - http://www.scopus.com/inward/record.url?scp=38249018068&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=38249018068&partnerID=8YFLogxK

U2 - 10.1016/0304-405X(90)90046-3

DO - 10.1016/0304-405X(90)90046-3

M3 - Article

AN - SCOPUS:38249018068

VL - 28

SP - 7

EP - 38

JO - Journal of Financial Economics

JF - Journal of Financial Economics

SN - 0304-405X

IS - 1-2

ER -