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  • articleNo Access

    ARBITRAGE PRICING THEORY IN ERGODIC MARKETS

    Traditional approaches to Arbitrage Pricing Theory (APT) propose a factor model, but empirical applications of APT are, nowadays, based on seemingly unrelated regression. I drop the factor model and assume only that the market is ergodic. This enables me to apply the theory of Hilbert spaces in a natural way. The expected return on any asset can always be approximated by an affine-linear function of its betas and we are able to estimate the relative number of assets that violate the APT equation by taking the expected returns and betas in the market into account. I present a simple sufficient condition for the APT equation in its inexact form. Further, I show that the APT equation holds true in its exact form if and only if an equilibrium market is exhaustive, which means that it must be possible to replicate the betas and idiosyncratic risk of each asset by some strategy that diversifies away all approximation errors in the market.

  • articleNo Access

    Important Factors of Estimated Return and Risk: The Taiwan Evidence

    This paper seeks to identify which factors are important for estimating portfolio's expected return and standard deviation in the Taiwan stock market. We have summarized from the existing empirical literature a total of 26 factors that may have explanatory power. The results of our evaluation show that except for the trading volume, the remaining 25 factors do not seem to help explain the average stock returns during the July 1985–June 1999 period. However, the power of the trading volume to account for the expected returns on the stock is affected by any changes in the sample or by the use of a different evaluation model. We suggest three potential explanations of why all 26 factors show no stable power to explain average returns on Taiwan stocks: high volatility, selection bias, and market differences. Moreover, we find that all of the 26 factors are important in capturing the systematic covariation in stock returns.

  • chapterNo Access

    PORTFOLIO OPTIMIZATION USING MARKOWITZ MODEL: AN APPLICATION TO THE BUCHAREST STOCK EXCHANGE

    The Bucharest Stock Exchange, with all its economical, social and political problems and sudden ups and downs, is a good reflection of the transition period that emerging economy is currently undergoing. This study focuses on the use of an appropriate methodology for constructing efficient stock portfolios in an extremely unstable market that makes the trade-off between risk and return even more difficult to achieve. The objective is set in order to assess the market behavior: employing the Markowitz model, to construct a set of optimum portfolios under a number of varying constraints and to compare them with the market portfolio. The results obtained are presented in the chapter along with a discussion of the main problems encountered due to the particular features of a stock market in a state of transition.