Explaining the single factor bias of arbitrage pricing models in finite samples

Explaining the single factor bias of arbitrage pricing models in finite samples

This paper shows that in finite samples it is not possible to distinguish all the latent factors from the idiosyncratic noise and that this leads to a bias towards the identification of a single factor. It provides an approximation to this bias and the corresponding sampling distribution.

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Veröffentlicht in:Economics letters 2008-04, Vol.99 (1), p.85-88
1. Verfasser: Harding, Matthew C.
Format: Artikel
Sprache:eng
Schlagworte:
Arbitrage
Arbitrage pricing theory
Asset pricing
Factor analysis
Financial engineering
Random matrix theory
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Beschreibung
Zusammenfassung:This paper shows that in finite samples it is not possible to distinguish all the latent factors from the idiosyncratic noise and that this leads to a bias towards the identification of a single factor. It provides an approximation to this bias and the corresponding sampling distribution.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2007.06.001