No Arbitrage and Arbitrage Pricing: A New Approach

Journal Article (Journal Article)

We argue that arbitrage‐pricing theories (APT) imply the existence of a low‐dimensional nonnegative nonlinear pricing kernel. In contrast to standard constructs of the APT, we do not assume a linear factor structure on the payoffs. This allows us to price both primitive and derivative securities. Semi‐nonparametric techniques are used to estimate the pricing kernel and test the theory. Empirical results using size‐based portfolio returns and yields on bonds reject the nested capital asset‐pricing model and linear APT and support the nonlinear APT. Diagnostics show that the nonlinear model is more capable of explaining variations in small firm returns. 1993 The American Finance Association

Full Text

Duke Authors

Cited Authors


Published Date

  • January 1, 1993

Published In

Volume / Issue

  • 48 / 4

Start / End Page

  • 1231 - 1262

Electronic International Standard Serial Number (EISSN)

  • 1540-6261

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/j.1540-6261.1993.tb04753.x

Citation Source

  • Scopus