Arbitrage Pricing Theory (APT), factor models, factor analysis, fundamental macroeconomic factors, parameter estimation methods, time-varying risk premiums
This chapter effectively introduces the Arbitrage Pricing Theory and factor models and the issues associated with their implementation, particularly parameter estimation and time-varying risk premiums. As with the book in general, this chapter is essentially non-technical, providing a higher level conceptual overview and referencing relevant previously published research for readers looking for more technical detail.
2.1 Description of the APT model
2.2 Factor analysis approach
2.3 Fundamental macroeconomic factor approach
2.4 Parameter estimation methodologies
2.5 Time-varying risk premiums
2.6 Problems with parameter estimation
2.7 Must risk premiums/expected returns be determined?
2.8 Missing final step to asset allocation
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