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- Title
Treasury Bill Factors and Common Stock Returns.
- Authors
OLDFIELD, JR., GEORGE S.; ROGALSKI, RICHARD J.
- Abstract
Capital asset pricing theory gives a linear ex ante relationship between a security's return and one special portfolio return, the return on all assets. This linear equation is called the capital asset pricing model. Capital asset pricing theory alone provides no empirical hypotheses because it is derived and defined wholly with expectations. Tests of empirical hypotheses with historical data require an additional proposition that relates ex ante and ex post returns. A model for this second proposition is called a return generating equation. Arbitrage pricing theory gives a more compact method for deriving a linear ex ante security return model. In the arbitrage theory developed by Ross the return generating equation is the basis for the ex ante return relationship. Briefly, an approximate linear expected return equation is derived directly from the return generating equation so two separate models are not required. In addition, the ex ante return equation is defined in terms of an arbitrary number of special factor portfolio returns rather than a single market portfolio return. In this sense, arbitrage pricing theory has richer implications and a simpler structure than capital asset pricing. Arbitrage pricing theory starts with a linear return generating equation for each security.
- Subjects
UNITED States; PRICING; ARBITRAGE; CAPITAL assets pricing model; TREASURY bills; RATE of return; SECURITIES trading
- Publication
Journal of Finance (Wiley-Blackwell), 1981, Vol 36, Issue 2, p337
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1981.tb00446.x