The papers of Long and Merton suggested interest rates and infla- tion as risk factors, but their models did not fully specify what all the hedge portfolios should be, or how many there should be. The APT specifies the factors only in a loose statistical sense. This leaves it up to empirical research to identify the risk factors or hedge portfolios. Chen et al. (1986) empirically evaluated several likely economic factors, and Chen et al. (1987) used these in an evaluation of equity mutual funds. Connor and Korajczyk (1988) showed how to extract statistical fac- tors from stock returns in a fashion theoretically consistent with the APT, and Connor.
