Linear beta pricing with inefficient benchmarks in a given factor structure*

Abstract

We show the equivalence between the zero-beta version of a multi-factor arbitrage pricing model and a linear pricing model utilizing undiversified inefficient benchmarks in a given factor structure. The resulting linear model is a two-beta model, with one beta related to the inefficient benchmark and another adjusting for its inefficiency. This linear model shows that there are only two distinctive and computable sources of risk, affecting security expected returns, despite the existence of several risk factors. In a short empirical example we demonstrate that the model can be employed to provide guidance and allow researchers to test for the validity of their selection of the underlying risk factors driving variations in security returns.

Publication DOI: https://doi.org/10.1080/1351847X.2019.1639207
Divisions: Aston Business School > Economics, Finance & Entrepreneurship
Aston Business School
Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis Group in European Journal of Finance on 16 July 2019, available online at: http://www.tandfonline.com/10.1080/1351847X.2019.1639207
Uncontrolled Keywords: asset pricing,bond interest rates,General portfolio choice,investment decisions,trading volume,Economics, Econometrics and Finance (miscellaneous)
Full Text Link: https://papers. ... 20&download=yes
Related URLs: http://www.scop ... tnerID=8YFLogxK (Scopus URL)
https://www.tan ... 7X.2019.1639207 (Publisher URL)
PURE Output Type: Article
Published Date: 2019-07-16
Published Online Date: 2019-07-16
Accepted Date: 2019-04-09
Authors: Diacogiannis, George
Ioannidis, Christos

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Version: Accepted Version

Access Restriction: Restricted to Repository staff only until 16 January 2021.


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