Journal of Applied Finance & Banking

The Amendment and Empirical Test of Arbitrage Pricing Models

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  The classical APT model is of the form  rj − E(rj) = βj(I − EI ) +εj , where  rj − E(rj)  is the earning deviation (called basic variance-profit) of the security j, I is a common factor. This paper considers the impact on the securities return caused by the skewness and kurtosis of the stock returns distributions, and poses a re-modified the arbitrage pricing model as follows  rj= E(rj)  + βj(I − EI ) +θj(I − EI )^2 +λj(I − EI )^3 +δj(I − EI )^4 +εj

  Based on the regression analysis method, and the fitting degree, one can arrive at this re-modified model has a more reasonable explanation level for securities pricing.