The residual market factor,the APT,and mean-variance efficiency

The rapidly increasing volume of both published and unpublished work on the arbitrage pricing theory (APT) of Ross (1976) has given rise to a number of misunderstandings at the interface of theoretical and econometric work. In this article we extend the theoretical structure of our previous work (McElroy and Burmeister, 1985, 1988; Burmeister and McElroy, 1987, 1988) to provide a broad yet rigorous framework both for econometric estimation and for better economic interpretation of new empirical results. We begin with the case where allK factors are observed, and then present the second case ofK−1≡J observed APT factors and one unobserved factor, theresidual market factor introduced in McElroy and Burmeister (1985). The economic interpretations for equivalent specifications of this model are discussed, and we enumerate several immediate payoffs to these specifications. The main new results are concerned with the sometimes intricate relationships among APT models withK factors and APT models withK factors that are constrained to satisfy mean-variance efficiency restrictions. These results are not only of theoretical interest, but more importantly they provide the basis for econometric estimation and testing of nested hypotheses. These econometric issues are discussed in detail.     

Has the United States Overinvested in Housing?

Several economists have concluded that housing investment has been excessive relative to industrial investment in the U.S. Most blame provisions of the federal income tax that favor owner-occupied housing.
This paper poses the question within a two-sector neoclassical growth model which permits the social return to housing to differ from that to non-housing. The model is estimated using national income accounts and capital stock data from 1929 to 1983. The conclusion is that the return to housing capital is about half that to non-housing capital and that the housing stock should be about 75% of its 1983 volume.     

Parallel imports and price controls

Price controls create opportunities for international arbitrage. Many have argued that such arbitrage, if tolerated, will undermine intellectual property rights and dull the incentives for investment in research‐intensive industries such as pharmaceuticals. We challenge this orthodox view and show, to the contrary, that the pace of innovation often is faster in a world with international exhaustion of intellectual property rights than in one with national exhaustion. The key to our conclusion is to recognize that governments will make different choices of price controls when parallel imports are allowed by their trade partners than they will when they are not.