Multifactor Models and Their Consistency with the APT

Ilan Cooper, Liang Ma, Paulo Maio, Dennis Philip

Research output: Contribution to journalArticlepeer-review


We examine the consistency of several prominent multifactor models from the empirical asset pricing literature with the arbitrage pricing theory (APT) framework. We follow the APT-related literature and estimate the common factor structure from a rich cross-section (associated with 42 major CAPM anomalies) by employing the asymptotic principal components method. Our benchmark model contains six statistical factors and clearly dominates, in both economic and statistical terms, most of the empirical multifactor models proposed in the literature by a good margin. These results represent a critical challenge to the current workhorse models in terms of explaining large-scale equity risk premiums. (JEL G10, G12)The Author(s) 2020. Published by Oxford University Press on behalf of The Society for Financial Studies.

Original languageAmerican English
Pages (from-to)402-444
Number of pages43
JournalReview of Asset Pricing Studies
Issue number2
StatePublished - 2020

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


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