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Rev Fin 1988; 1:159-172
© 1988 the Society for Financial Studies

Article

Preferences, continuity, and the arbitrage pricing theory

RA Jarrow
S.C. Johnson Graduate School of Management, Cornell University, Ithaca, NY14853, USA

Abstract

This article investigates the structure on preferences required to derive Ross's arbitrage pricing theory (APT). It is shown that only ordinal preferences are required. In particular, the APT does not require that agents possess preferences representable as risk-averse expected utility functions. This characteristic of the APT is not shared by the standard equilibrium-based capital asset pricing models.


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