EMPIRICAL TESTS OF MULTI- FACTOR PRICING MODEL The Arbitrage Pricing Theory: Some Empirical Results MARC R. REINGANUM* I. Introduction THE ACCUMULATION of empirical evidence inconsistent with the simple oneperiod capital asset pricing models of Sharpe (1964), Lintner (1965), and Black (1972) indicates that alternative models of capital market equilibrium deserve investigation. A minimum requirement for any alternative model should be that it explains the empirical anomalies which arise within the simple CAPM. One such anomaly is observed when portfolios are formed on the basis of firm size (see Banz  and Reinganum [1980b, c]). Small firms systematically experienced average rates of return nearly 20% per year greater than those of large firms, even after accounting for differences in estimated betas. An adequately specified model of equilibrium should eliminate these persistent âabnormalâ returns. The arbitrage pricing theory (APT) proposed by Ross (1976) is a plausible alternative to the simple one-factor CAPM. The appeal of the APT probably comes from its implication that compensation for bearing risk may be comprised of several risk premia, rather than just one risk premium as in the CAPM. Roll and Ross (1979) claim to find empirically at least three and probably four factors that
The Journal of Finance – Wiley
Published: May 1, 1981
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