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 proceedingChapter in an edited book (as author)Academic researchpeer-review

3 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 languageEnglish
Title of host publicationHandbook of Financial Econometrics and Statistics
PublisherSpringer New York LLC
Pages1003-1023
Number of pages21
ISBN (Electronic)9781461477501
ISBN (Print)9781461477495
DOIs
Publication statusPublished - 1 Jan 2015
Externally publishedYes

ASJC Scopus subject areas

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

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