NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Notes on Dynamic Factor Pricing Models

Bruce N. Lehmann

NBER Working Paper No. 3677 (Also Reprint No. r1721)
Issued in April 1991
NBER Program(s):   ME

These notes discuss three aspects of dynamic factor pricing (i.e., APT) models. The first one is that diversifiable idiosyncratic risk is unpredictable in a no-arbitrage world. The second feature is that the conditional factor loadings or betas on the common factors are approximately constant when returns follow an unconditional factor structure. The third topic concerns the estimation of dynamic factor pricing models in large cross-sections when returns follow an unconditional factor structure. These results aid in the interpretation of existing applications and identify some of the issues in the formulation and estimation of dynamic factor pricing models.

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Document Object Identifier (DOI): 10.3386/w3677

Published: Review of Quantitative Finance and Accounting, Vol. 2, No. 1, pp. 69-87, (March 1992).

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