An Empirical Test of the Arbitrage Pricing Theory on Australian Stock Returns 1974-85

Purpose – The purpose of this paper is to propose a new and improved version of arbitrage pricing theory (APT), namely, downside APT (D-APT) using the concepts of factors’ downside beta and semi-variance. Design/methodology/approach – This study includes 163 stocks traded on the Malaysian stock market and uses eight macroeconomic variables as the dependent and independent variables to investigate the relationship between the adjusted returns and the downside factors’ betas over the whole period 1990-2010, and sub-periods 1990-1998 and 1999-2010. It proposes a new version of the APT, namely, the D-APT to replace two deficient measures of factor's beta and variance with more efficient measures of factors’ downside betas and semi-variance to improve and dispel the APT deficiency. Findings – The paper finds that the pricing restrictions of the D-APT, in the context of an unrestricted linear factor model, cannot be rejected over the sample period. This means that all of the identified factors are able to price stock returns in the D-APT model. The robustness control model supports the results reported for the D-APT as well. In addition, all of the empirical tests provide support the D-APT as a new asset pricing model, especially during a crisis. Research limitations/implications – It may be worthwhile explaining the autocorrelation limitation between variables when applying the D-APT. Practical implications – The framework can be useful to investors, portfolio managers, and economists in predicting expected stock returns driven by macroeconomic and financial variables. Moreover, the results are important to corporate managers who undertake the cost of capital computations, fund managers who make investment decisions and, investors who assess the performance of managed funds. Originality/value – This paper is the first study to apply the concepts of semi-variance and downside beta in the conventional APT model to propose a new model, namely, the D-APT.

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

Global Business Review ◽

10.1177/097215091201300305 ◽

2012 ◽

Vol 13 (3) ◽

pp. 421-432 ◽

Cited By ~ 6

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.

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Autoregression Vector Prediction on Banking Stock Return using CAPM Model Approach and Multi-Factor APT (IJCIET)

10.31227/osf.io/yqvxa ◽

2018 ◽

Author(s):

Andysah Putera Utama Siahaan ◽

Rusiadi

Keyword(s):

Asset Pricing ◽

Stock Returns ◽

Capital Asset Pricing Model ◽

Capital Asset Pricing ◽

Arbitrage Pricing Theory ◽

Capital Asset ◽

Arbitrage Pricing ◽

Asset Pricing Model ◽

Model Method ◽

Pricing Theory

This study aims to predict banking stock returns in Indonesia. The problem under study is the difficulty of determining banking stock returns. This study uses the VAR approach by comparing CAPM and APT. The results show the CAPM (Capital Asset Pricing Model) method through RF (Return Risk-Free Assets) is more accurate in predicting stock returns than the APT (Arbitrage Pricing Theory) method. In the medium term, the CAPM (Capital Asset Pricing Model) method through RF (Return Risk-Free Assets) is more accurate in predicting stock returns than the APT (Arbitrage Pricing Theory) method. In the long run, the CAPM (Capital Asset Pricing Model) method is also more accurate in predicting stock returns than the APT (Arbitrage Pricing Theory) method. Model specifications formed using the Roots of Characteristic Polynomial and Inverse Roots of AR Characteristic Polynomial obtained stable results; it can be shown that all roots units are in the Inverse Roots of AR Characteristic Polynomial circle.

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A Robust Application of the Arbitrage Pricing Theory: Evidence from Nigeria

Journal of Economics and Behavioral Studies ◽

10.22610/jebs.v9i1.1565 ◽

2017 ◽

Vol 9 (1) ◽

pp. 141

Author(s):

Oyetayo Oluwatosin J. ◽

Adeyeye Patrick Olufemi

Keyword(s):

Stock Returns ◽

Stock Price ◽

Ordinary Least Squares ◽

Arbitrage Pricing Theory ◽

Arbitrage Pricing ◽

Expected Return ◽

Long Run ◽

Short Run ◽

Pricing Theory ◽

Relationship Of

Arbitrage pricing theory (APT) is a testable theory based on the idea that in competitive financial markets arbitrage will ensure that riskless assets provide the same expected return. We sought to confirm the relevance of the arbitrage pricing theory in Nigeria. Guided by a good understanding of macroeconomic variables and stock price movements as found in the extant literature on arbitrage pricing theory (APT), we specified our APT equation for estimation. Having satisfied the integration and co-integration issues, we employ the error-correction (ECM) and the fully modified ordinary least squares (FMOLS) methods for the short-run and long-run regressions. Our short-run results seem to agree with existing theories on APT thus confirming that APT is relevant in Nigeria. However, the long-run relationship of stock returns and RGDP was found to be contentious. Even though our result runs contrary to predictions on the relationship between the two, we found peculiar events and circumstances within the Nigerian macroeconomic context that provides logical reasons for the deviation.

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Asset Pricing Through Downside Risk Based Arbitrage Pricing Theory: Empirical Evidence from Pakistan Stock Exchange

10.34091/ajss.13.2.02 ◽

2020 ◽

Keyword(s):

Asset Pricing ◽

Stock Returns ◽

Stock Exchange ◽

Downside Risk ◽

Arbitrage Pricing Theory ◽

Pricing Model ◽

Arbitrage Pricing ◽

Asset Pricing Model ◽

Risk Return ◽

Pricing Theory

This study extends the downside risk applications in multifactor asset pricing model by incorporating the downside risk spillovers from economic and financial factors to stock returns. We amplify the conventional APT model by replacing the variance-based betas with semivariance based downside betas that better capture the risk volatilities in varying market conditions. The inclusion of downside risk betas based on semivariance and semideviation methods in the augmented asset pricing model improves both the theoretical and methodological applications relative to the limitations and restriction of conventional APT factors model. The mean-variance hypothesis replaced by meansemivariance hypothesis and asymmetric behaviour of stock returns distribution, empirically suggest the use of an alternative factors model. The models based on downside risk premia for asset pricing in emerging markets. The study tested the downside risk-return relationship based on the excess monthly stock returns of listed PSX firms and observed economic, financial and global factors representing spillover triangulation from 1997 to 2017. The findings of the study indicate that the augmented DR-APT model with pricing restrictions of unconditional linear factors method could not be deserted over the targeted period of study. The selected observed pricing factors except exports are significant enough for pricing the security returns in the augmented DR-APT Model. Findings of the panel regression, likelihood ratio tests and F-test corroborate DR-APT as a better model to price stock returns in volatile situations compare to conventional APT model. Our findings are consistent with the downside risk-return framework based on mean semi variance hypothesis and have implications for managers and decision markets that incorporate downside risk in asset valuation, cost of capital estimations, portfolio construction and investment analysis decisions. Key Words: Downside Risk, Semi variance, Semi covariance, Downside Beta, Downside risk-based Arbitrage Pricing Theory (DR-APT).

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

THE LAHORE JOURNAL OF ECONOMICS ◽

10.35536/lje.2001.v6.i1.a3 ◽

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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Arbitrage Pricing Theory Model Application on Tobacco and Cigarette Industry in Indonesia

IJBE (Integrated Journal of Business and Economics) ◽

10.33019/ijbe.v3i2.160 ◽

2019 ◽

Vol 3 (2) ◽

pp. 179

Author(s):

Sakina Ichsani ◽

Neneng Susanti ◽

Agatha Rinta Suhardi

Keyword(s):

Economic Growth ◽

Exchange Rates ◽

Stock Returns ◽

Quantitative Methods ◽

Stock Exchange ◽

Theory Model ◽

Arbitrage Pricing Theory ◽

Arbitrage Pricing ◽

Cigarette Industry ◽

Pricing Theory

The purpose of this study was to applicant the Arbitrage Pricing Theory model in the tobacco and cigarette industry listed on the IDX. The APT model in this study uses macroeconomic variables consisting of exports, inflation, exchange rates, GDP and economic growth. Object of this research is companies listed on the Indonesia Stock Exchange in the period 2012-2017 using monthly periods, which is Gudang Garam Tbk., Handjaya Mandala Sampoerna Tbk., and Bentoel International Investama Tbk. This study uses quantitative methods and analysis will be used with regression analysis methods and data processed using Eviews 10. The results of the study show that there are simultaneous effects between the variables of exports (X1), inflation (X2), exchange rates (X3), GDP (X4), and economic growth (X5) on stock returns (Y). There is a significant positive effect between economic growth on stock returns, while there is a significant negative effect between inflation on stock returns and GDP on stock returns. While exports do not affect the stock returns of the tobacco and cigarette industry as well as the exchange rate does not affect stock returns. Suggestions for investors are if investors are going to invest in the tobacco and cigarette industry, then investors should pay attention to the macroeconomic conditions that affect stocks, while for companies can minimize the risks that might occur through agreements between the destination countries for cigarette sales.

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