Applied research on factor analysis in Arbitrage Pricing Theory

The biggest challenge of Arbitrage Pricing Theory (APT) is how to screen out the factors that need too much computation. Factor analysis abstracts a few factors from a large number of original variables. Through the factor analysis, this article identifies four factors out of eleven original variables containing most information about those eleven variables. Using the four factors, this article builds a pricing model that makes a better effect in pricing through empirical analyses.