The Arbitrage Pricing Theory and Multifactor Models of Asset Returns

The Arbitrage Pricing Theory (APT) of Ross (1976, 1977), and extensions of that theory, constitute an important branch of asset pricing theory and one of the primary alternatives to the Capital Asset Pricing Model (CAPM). In this chapter we survey the theoretical underpinnings, econometric testing, and applications of the APT. We aim for variety in viewpoint without attempting to be all-inclusive. Where necessary, we refer the reader to the primary literature for more complete treatments of the various research areas we discuss