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Stability of the Arbitrage Pricing Theory Model Factors

Patrick A. Hays, David E. Upton and Carroll D. Aby, Jr.
Quarterly Journal of Business and Economics
Vol. 36, No. 2 (Spring, 1997), pp. 71-81
Published by: Creighton University
Stable URL: http://www.jstor.org/stable/40473214
Page Count: 11
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Stability of the Arbitrage Pricing Theory Model Factors
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Abstract

This study examines the stability of empirically estimated arbitrage pricing theory (APT) model factor sensitivities. The Ashley stability test, which is exact and powerful, is applied to the coefficients of factors extracted from large returns dataseis for both individual securities and portfolios. In most previous tests of APT models the stability of the factor sensitivities over the analysis period is implicitly assumed. The results from this study suggest that parameter instability exists for all factors in the APT model for both within group and holdout samples. The parameter instability exhibits no identifiable pattern or trend and appears to be in the form of random discrete jumps or shifts.

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