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

Robert McCulloch, Peter E. Rossi

Research output: Contribution to journalArticle

43 Scopus citations

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 - Jan 1 1990
Externally publishedYes

ASJC Scopus subject areas

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

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