arbitrage pricing theory and multifactor models of risk and return

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1、Chapter10:ArbitragePricingTheoryandMultifactorModelsofRiskandReturnChapterOpenerp.318PART  IIITHEEXPLOITATIONOF securitymispricinginsuchawaythatrisk-freeprofitscanbeearnediscalledarbitrage.Itinvolvesthesimultaneouspurchaseandsaleofequivalentsecuritiesinordertoprofitfromdiscrepanciesintheirp

2、rices.Perhapsthemostbasicprincipleofcapitalmarkettheoryisthatequilibriummarketpricesarerationalinthattheyruleoutarbitrageopportunities.Ifactualsecuritypricesallowforarbitrage,theresultwillbestrongpressuretorestoreequilibrium.Therefore,securitymarketsoughttosatisfya“no-arbitragecondition.”In

3、thischapter,weshowhowsuchno-arbitrageconditionstogetherwiththefactormodelintroducedin Chapter8 allowustogeneralizethesecuritymarketlineoftheCAPMtogainricherinsightintotherisk–returnrelationship.   Webeginbyshowinghowthedecompositionofriskintomarketversusfirm-specificinfluencesthatweintroduc

4、edinearlierchapterscanbeextendedtodealwiththemultifacetednatureofsystematicrisk.Multifactormodelsofsecurityreturnscanbeusedtomeasureandmanageexposuretoeachofmanyeconomywidefactorssuchasbusiness-cyclerisk,interestorinflationraterisk,energypricerisk,andsoon.Thesemodelsalsoleadustoamultifactor

5、versionofthesecuritymarketlineinwhichriskpremiumsderivefromexposuretomultiplerisksources,eachwiththeirownriskpremium.   Weshowhowfactormodelscombinedwithano-arbitrageconditionleadtoasimplerelationshipbetweenexpectedreturnandrisk.Thisapproachtotherisk–returntrade-offiscalledarbitragepricingt

6、heory,orAPT.WederivetheAPT,andshowwhyitimpliesamultifactorsecuritymarketline.Weasknextwhatfactorsarelikelytobethemostimportantsourcesofrisk.ThesewillbethefactorsgeneratingsubstantialhedgingdemandsthatbroughtustothemultifactorCAPMintroducedin Chapter9.BoththeAPTandtheCAPMthereforeleadtomulti

7、ple-riskversionsofthesecuritymarketline,therebyenrichingtheinsightswecanderiveabouttherisk–returnrelationship.10.1MultifactorModels:AnOverviewp.319Theindexmodelintroducedin Chapter8 gaveusawayofdecomposingstockvariabilityintomarketorsystematicrisk,duelar