Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-25T07:58:22.313Z Has data issue: false hasContentIssue false
  • English
  • Français

Determining the Number of Priced State Variables in the ICAPM

Published online by Cambridge University Press:  06 April 2009

Eugene F. Fama
Eugene F. Fama
Affiliation:
Graduate School of Business, University of Chicago, 1101 East 58th Street Chicago, IL 60637.
Get access Rights & Permissions [Opens in a new window]

Abstract

Suppose the ICAPM governs asset prices and there is a total of S state variables that might be of hedging concern to investors. Can we determine which state variables are, in fact, of hedging concern? What does it mean to say that these state variables are priced, that is, that they give rise to special risk premiums in expected returns? The goal of this paper is to formulate this problem clearly and show when it can and cannot be solved. Ignoring estimation problems, it is possible to find the set of priced state variables when the state variables are identified (named). When we know the number of state variables, but not their names, confident conclusions about even the number of them that produce special risk premiums are probably impossible, unless the number is zero, so the ICAPM collapses to the CAPM.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 33 , Issue 2 , June 1998 , pp. 217 - 231
Copyright
Copyright © School of Business Administration, University of Washington 1998

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Black, F. “Capital Market Equilibrium with Restricted Borrowing.” Journal of Business, 45 (1972), 444–455.CrossRefGoogle Scholar
Brown, S. J. “The Number of Factors in Security Returns.” Journal of Finance, 44 (1989), 1247–1262.CrossRefGoogle Scholar
Chen, N.-F. “Some Empirical Tests of the Theory of Arbitrage Pricing.” Journal of Finance, 38 (1983), 1393–1414.CrossRefGoogle Scholar
Connor, G. “A Unified Beta Pricing Theory.” Journal of Economic Theory, 34 (1984), 13–31.CrossRefGoogle Scholar
Fama, E. F.Foundations of Finance. New York, NY: Basic Books (1976).Google Scholar
Fama, E. F. “Multifactor Portfolio Efficiency and Multifactor Asset Pricing.” Journal of Financial and Quantitative Analysis, 31 (1996), 441–465.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Multifactor Explanations of Asset Pricing Anomalies.” Journal of Finance, 51 (1996), 55–84.CrossRefGoogle Scholar
Huberman, G.; Kandel, S.; and Stambaugh, R. F.. “Mimicking Portfolios and Exact Arbitrage Pricing.” Journal of Finance, 42 (1987), 1–9.CrossRefGoogle Scholar
Lintner, J. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” Review of Economics and Statistics, 47 (1965), 13–37.CrossRefGoogle Scholar
Markowitz, H.Portfolio Selection: Efficient Diversification of Investments. New York, NY: Wiley (1959).Google Scholar
Merton, R. C. “An Intertemporal Capital Asset Pricing Model.” Econometrica, 41 (1973), 867–887.CrossRefGoogle Scholar
Roll, R. “A Critique of the Asset Pricing Theory's Tests' Part I: On Past and Potential Testability of the Theory.” Journal of Financial Economics, 4 (1977), 129–176.CrossRefGoogle Scholar
Roll, R., and Ross, S. A.. “An Empirical Investigation of the Arbitrage Pricing Theory.” Journal of Finance, 35 (1980), 1073–1103.CrossRefGoogle Scholar
Sharpe, W. F. “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance, 19 (1964), 425–442.Google Scholar