An empirical test of the arbitrage pricing theory

This paper provides an ex‐post analysis of a multifactor return‐generating model using the factor scores obtained from a common factor analysis of industry‐based portfolios. For the 1975–1980 time period, the correlations among common stock returns can be adequately explained by a three‐factor model. Furthermore, ex post, at least three factors are priced in the stock market. A brief economic interpretation of the proposed common factor is also presented.