Journal of Applied Finance & Banking

The Amendment and Empirical Test of Arbitrage Pricing Models

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    The classical APT model is of the form  rj E(rj) = j(I EI ) +j , where  rj E(rj)  is the earning deviation (called basic variance-profit) of the security j, I is a common factor. This paper considers the impact on the securities return caused by the skewness and kurtosis of the stock returns distributions, and poses a re-modified the arbitrage pricing model as follows  rj= E(rj)  + j(I EI ) +j(I EI )^2 +j(I EI )^3 +j(I EI )^4 +j

    Based on the regression analysis method, and the fitting degree, one can arrive at this re-modified model has a more reasonable explanation level for securities pricing.