Stable linear-time optimisation in arbitrage pricing theory models
Gordon Ritter proposes a stable mean-variance optimisation for APT models
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1 Markowitz optimisation and arbitrage pricing theory 1.1 Arbitrage pricing theory.Many models for asset returns in empirical finance, following Ross (1976), assume a linear functional form:
Rt+1=Xtft+ϵt,?[ϵ]=0,?[ϵ]=D (1)where Rt+1 is an n-dimensional random vector containing the cross-section of returns in excess of the risk-free rate over some time interval [t,t+1], Xt is a (non-random) n×p matrix that is known before time t, and ϵt is assumed to follow
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