An empirical test of the arbitrage pricing theory in the Hong Kong stock market

1985 ◽  
Author(s):  
Moon-chuen Yuen
Keyword(s):  
Hong Kong ◽  
Stock Market ◽  
Empirical Test ◽  
Arbitrage Pricing Theory ◽  
Arbitrage Pricing ◽  
Pricing Theory ◽  
Hong Kong Stock Market

An Empirical Test of the Arbitrage Pricing Theory—The Case of Indian Stock Market

2012 ◽  
Vol 13 (3) ◽  
pp. 421-432 ◽  
Author(s):  
Debarati Basu ◽  
Deepak Chawla
Keyword(s):  
Capital Markets ◽  
Empirical Test ◽  
Explanatory Power ◽  
Arbitrage Pricing Theory ◽  
Arbitrage Pricing ◽  
Explanatory Variables ◽  
Portfolio Returns ◽  
Two Factors ◽  
Pricing Theory ◽  
The One

With increasing doubt about the validity of the one-factor Capital Asset Pricing Model in pricing financial assets, development of newer models or extensions has become the order of the day. This paper applies one of these developments—the multi-factor Arbitrage Pricing Theory (APT) to explore the relationship between portfolio returns and selected macroeconomic variables. While the chosen model has been extensively tested in developed markets, few such attempts have been made in emerging capital markets. Thus, the purpose of this study is to test the validity of the APT model in India, which has, over the years, gained immense importance in the investors’ minds, the world over. Moreover, the surge in volatility and growth in the Indian capital markets over the past five years makes it an interesting market to study given the rising significance of the risk-return trade-off in such a market. The paper examines ten portfolios, covering 50 stocks, over a five-year period from 1 January 2003 to 1 February 2008 to verify the efficiency and efficacy of the model and finds that APT is a suitable descriptor of asset prices in the Indian context. To overcome the problem of multicollinearity among the macroeconomic explanatory variables, a factor analysis was carried out that resulted in two factors namely the inflation factor and the market index. The excess portfolio returns were regressed on these factors. The regression results display accurate relationships that are significant for each of the 10 portfolios and moderate to high explanatory power. Thus, it concludes that APT is a good fit in India over the chosen sample period.

scholarly journals Macroeconomic Variables as Common Pervasive Risk Factors and Empirical Content of the Arbitrage Pricing Theory in Pakistan

2001 ◽  
Vol 6 (1) ◽  
pp. 55-74
Author(s):  
Ali Ataullah
Keyword(s):  
Asset Pricing ◽  
Empirical Test ◽  
Building Blocks ◽  
Individual Investors ◽  
Arbitrage Pricing Theory ◽  
Arbitrage Pricing ◽  
Macroeconomic Factors ◽  
Corporate Managers ◽  
Asset Pricing Theory ◽  
Pricing Theory

The Arbitrage Pricing Theory (APT) of Ross [1976] is one of the most important building blocks of modern asset pricing theory, and the prime alternative to the celebrated Capital Asset Pricing Model (CAPM) of Sharpe [1964], Lintner [1965], and others. This paper briefly reviews the theoretical underpinnings underlying the APT and highlights the econometric techniques used to test the APT with pre-specified macroeconomic factors. Besides this, the prime objective of this study is to perform an empirical test of the APT in the Pakistani stock market by using pre-specified macroeconomic factors and employing Iterative Non-Linear Seemingly Unrelated Regressions (ITNLSUR). These empirical results will be, hopefully, helpful for corporate managers undertaking cost of capital calculations, for domestic and international fund managers making investment decisions and, amongst others, for individual investors who wish to assess the performance of managed funds.

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