A Test For A Multi-Risk Premia International Asset Pricing Model: An Arbitrage Pricing Theory Application

Asset pricing with arbitrage activity∗

We study an economy populated by three groups of myopic agents: Constrained agents subject to a portfolio constraint that limits their risk-taking, unconstrained agents subject to a standard nonnegative wealth constraint, and arbitrageurs with access to a credit facility. Such credit is valuable as it allows arbitrageurs to exploit the limited arbitrage opportunities that emerge endogenously in...

Liquidity risk and arbitrage pricing theory

Classical theories of financialmarkets assume an infinitely liquidmarket and that all traders act as price takers. This theory is a good approximation for highly liquid stocks, although even there it does not apply well for large traders or for modelling transaction costs. We extend the classical approach by formulating a new model that takes into account illiquidities. Our approach hypothesize...

Virtual Arbitrage Pricing Theory

We generalize the Arbitrage Pricing Theory (APT) to include the contribution of virtual arbitrage opportunities. We model the arbitrage return by a stochastic process. The latter is incorporated in the APT framework to calculate the correction to the APT due to the virtual arbitrage opportunities. The resulting relations reduce to the APT for an infinitely fast market reaction or in the case wh...

Liquidity Risk and Arbitrage Pricing Theory

We shall study the paper by Cetin, Jarrow, Protter, [1]. This pa-per extends classical arbitrage pricing theory to include liquidity risk bystudying an economy where the security’s price depends on the trade size.Extended first and second fundamental theorems of asset pricing are in-vestigated. In an approximately complete market, derivative prices areshown to be the cla...

The Arbitrage Pricing Theory and Multifactor Models of Asset Returns*