Multifactor, multi-indicator approach to asset pricing: Method and empirical evidence

Cheng Few Lee; K. C. John Wei; Hong Yi Chen

doi:10.1007/978-1-4614-7750-1_36

Multifactor, multi-indicator approach to asset pricing: Method and empirical evidence

Cheng Few Lee, K. C. John Wei, Hong Yi Chen

Research output: Chapter in book / Conference proceeding › Chapter in an edited book (as author) › Academic research › peer-review

5 Citations (Scopus)

Abstract

This paper uses a multifactor, multi-indicator approach to test the capital asset pricing model (CAPM) and the arbitrage pricing theory (APT). This approach is able to solve the measuring problem in the market portfolio in testing CAPM;and it is also able to directly test APT by linking the common factors to the macroeconomic indicators. Our results from testing CAPM support Stambough’s (Journal of Financial Economics, 10, 237–268, 1982) argument that the inference about the tests of CAPM isinsensitive to alternative market indexes. We propose a MIMIC approach to test CAPM and APT. The beta estimated from the MIMIC model by allowing measurement error on the market portfolio does not significantly improve the OLS beta, while the MLE estimator does a better job than the OLS and GLS estimators in the cross-sectional regressions because the MLE estimator takes care of the measurement error in beta. Therefore, the measurement error problem on beta is more serious than that on the market portfolio.

Original language	English
Title of host publication	Handbook of Financial Econometrics and Statistics
Publisher	Springer New York LLC
Pages	1003-1023
Number of pages	21
ISBN (Electronic)	9781461477501
ISBN (Print)	9781461477495
DOIs	https://doi.org/10.1007/978-1-4614-7750-1_36
Publication status	Published - 1 Jan 2015
Externally published	Yes

ASJC Scopus subject areas

Economics, Econometrics and Finance(all)
General Business,Management and Accounting
General Mathematics

More information

10.1007/978-1-4614-7750-1_36

Cite this

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Multifactor, multi-indicator approach to asset pricing: Method and empirical evidence

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ASJC Scopus subject areas

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