Assets Pricing 资产定价（四）

Lec 5 APT Model-Multi Factor Model 套利定价理论-多因子模型

Problem of CAPM

• Since CAPM is based on historical data it is most appropriate when conditions are relatively stable. If conditions change, the beta coefficient estimated from the sample may not correspond to the likely future value. CAPM是基于历史数据的，因此在条件稳定的时候最准确。如果条件改变，从历史数据中估计出的beta系数可能于未来值不符，从而产生定价偏差。
• The efficacy of CAPM tests is conditional on the efficiency of the market portfolio. The index turns out to be ex-post efficient, if every asset is falling on the security market line. CAPM测试的有效性取决于市场组合的效率。如果所有资产都落在证券市场线上，那么该指数就具有事后效率。

Basic idea of ATP

The idea of arbitrage underlies the APT. Arbitrage ensures that the same “bundle” of systematic risks sells for the same price.

Expected and Unexpected return

${\overline{R}}_i$: is expected return, is not a random variable and is not the source of risk.

$u_i$: is unexpected shocks and the risk raises from it. The characteristic of $u_i$ will influences ${\overline{R}}_i$

$R_i={\overline{R}}_i+u_i$

Systematic and unsystematic risk

$u_i=m_i+{ϵ}_i$

• Systematic risk for asset $i$, $m_i$, is then related to unexpected economy-wide shocks (such as unanticipated fluctuations in GNP, inflation, the terms of trade or real interest rates):
  $$m_i={\beta }_{iY}{F}_Y+{\beta }_{i\pi }{F}_{\pi }+{\beta }_{iX}{F}_X+{\beta }_{ir}{F}_r$$
  Systematic risk $m_i$ cannot be eliminated by holding a diversified portfolio.

• In a $k$-factor model we simply use a numerical index to denote each of the systematic risks affecting returns on stock $i$:
  $$R_i={\overline{R}}_i+u_i={\overline{R}}_i+{\beta }_{i1}{F}_1+{\beta }_{i2}{F}_2+\cdots +{\beta }_{ik}{F}_k+{ϵ}_i$$
  Unsystematic risk ${ϵ}_i$ can be eliminated by holding a diversified portfolio. For market portfolio ${x\text{x}x}_M$ with $N$ stocks, ${ϵ}_i$ satisfies
  $$Var(\sum _{i=1}^N{x}_i{ϵ}_i)=0$$

Arbitrage also implies the expected return ${\overline{R}}_i$, on a stock $i$ will depend on the ${\beta }_{ij}$ coefficients showing how systematic unexpected shocks $F_j$ affect unexpected returns $u_i=R_i-{\overline{R}}_i$.

And the equilibrium returns ${\overline{R}}_{F_j}$, for bearing “one unit” of each type of systematic shock $F_j$. So we have:
$${\overline{R}}_i=r+{\beta }_{i1}[{\overline{R}}_{F_1}-r]+{\beta }_{i2}[{\overline{R}}_{F_2}-r]+\cdots +{\beta }_{ik}[{\overline{R}}_{F_k}-r]$$
Plug in, we get the Actual Returns under APT:
$$\begin{array}{rl}{R}_i& ={\overline{R}}_i+{\beta }_{i1}{F}_1+{\beta }_{i2}{F}_2+\cdots +{\beta }_{ik}{F}_k+{ϵ}_i\\ & =r+\sum _{j=1}^k{\beta }_{ij}[{\overline{R}}_{F_j}-r]+\sum _{j=1}^k{\beta }_{ij}{F}_j\end{array}$$

• $\beta$ for a stock has two effects on its actual returns

Question:

(1) How do CAPM and APT models explain systematic risk and unsystematic risk for an asset (or stock) in the stock market respectively?

(2) Are CAPM and APT consistent (or compatible) ? Please show it.

(3) Compare the advantages of APT model over CAPM

(1)

CAPM
$$R_i-r={\alpha }_i+{\beta }_i(R_M-r)+{ϵ}_i$$

• Term ${\beta }_i(R_M-r)$ corresponds to the systematic risk, which cannot be diversified.

• The error term ${ϵ}_i$ corresponds to the unsystematic risk, which satisfies $Cov({ϵ}_i,R_M)=0$.

Hence the following decomposition of total risk as measured by the variance is possible:
$$Var(R_i)={\beta }_i^{2}Var(R_M)+Var({ϵ}_i)$$
APT
R i = R ‾ i + u i = R ‾ i + m i + ϵ i R_i=\overline {R}_i+u_i=\overline {R}_i+m_i+\epsilon_i