The Arbitrage Pricing Theory and Macroeconomic Factor Measures

What drives the performance of convertible-bond funds?

“…Following Fama and French (1993), Burmeister and Wall (1986), and Elton et al (1999), we consider four bond risk factors: (i) TERM, which is a proxy for unexpected changes in interest rates and is defined as the return of the Lehman US Government Long Bond Index minus the one-month Treasury bill rate; (ii) DEFT, which is a proxy for the default factor and is defined as the return on the Lehman US Corporate Long Bond Index minus the return of the Lehman US Government Long Bond Index; 7 (iii) HY, which captures both a term and a credit premium and is defined as the return on the Merrill 5 The CRSP database includes information on fund objectives, fund returns, total net asset values, expense ratios, fund age, fund status (dead or active), asset compositions (e.g., percentages invested in convertible bonds, stocks, and bonds), and other fund characteristics. Returns and total net assets are reported monthly.…”

An unobserved component model of asset pricing across financial markets

“…Therefore, in the mid-1980s, interest increased in developing models with perhaps poorer explanatory power but greater economic understanding for use in testing the APT. Two important studies appeared during this time; that is, Chen et al (1986) and Burmeister and Wall (1986). The primary difference between these two papers is the econometric methodology employed by the authors.…”

“…Retail sales were found to be significant risk factors in research by Burmeister and Wall (1986). Changes in sales are a measure representing the business cycle, profitability, and cash flow for firms.…”

“…Within the APT literature, Burmeister and Wall (1986), Chen et al (1986), and Kavussanos, Marcoulis, and Arkoulis (2002) initiate investigations of economic variables as factors. Within the ICAPM literature, economic factors play a natural role through the consumption planning features of these models and examples of empirical studies of such models include Campbell (1996), Cochrane (1996), and Fama and French (1989).…”

Using Canonical Correlation to Identify Arbitrage Pricing Theory Factors

“…Further research by Fogler, John, and Tipton [1981], Chen, Ross, and Roll [1986], Burmeister and Wall [1986], and Christofi, Christofi and Philippatos [1993], among others, have concentrated on factor identification in an attempt to link macroeconomic variables and APT factors. An economic identification of APT factors would provide a more concise explanation of how systematic risk is priced in the marketplace.…”