Literature review of arbitrage pricing theory apt

The results suggested that both variables influenced stock prices. Hamao replicated the Chen, et al study in the multi-factor APT framework.

Thus, the two common factors acquire have been international by nature. Exchange Rate and Stock Return Reference 2 examined the relationship the Singapore stock index and the exchange rate and revealed a positive relationship.

There is a significant positive relationship between the percentage change in the money supply M1 and the stock return. For such countries, increases in oil prices would cause a rise in production costs and a subsequent fall in aggregate economic activity. Normality Tests Table 1 reports the summary statistics for the stocks in the sample.

For instance, the assumptions that there are no taxes and no transaction costs do not conform to reality. The empirical test of APT is carried out by two different approaches factor analytic approach and pre-specified macro-factor approach as formulated by Roll and Ross and Chen et al.

More so the feedback effect should have been considered. The sensitivity of the asset's returns to the markets was defined as the asset's beta, measuring systematic market risk, while the unsystematic unique risk of the asset portfolio tended to zero through diversification. He examined stocks by using daily return data during the periods of to from the New York Stock Exchange.

The trend of pre-specifying factors seems to be a promising avenue of research in the search for meaningful factor structure is generally accepted.

Reference 2 examined the relationship between the Singapore stock index and inflation rate and it revealed the existence of a significant positive relationship between inflation and Singapore stock returns.

Macroeconomic vs. Statistical APT Approach in the Athens Stock Exchange

For this purpose, the monthly return of all the shares included in the EGX30 index from January to December of the Egyptian Stock Exchange is used as the dependent variable. SharpeJohn Lintner and Jan Mossin independently. Reference 5 examined the relationship between the New Zealand Stock Index and the short term interest rate.

All independent variables are used as percentage change of the variable itself.

Arbitrage pricing theory

Uncertainty[ edit ] For "choice under uncertainty" the twin assumptions of rationality and market efficiencyas more closely defined, lead to modern portfolio theory MPT with its capital asset pricing model CAPM —an equilibrium-based result—and to the Black—Scholes—Merton theory BSM; often, simply Black—Scholes for option pricing —an arbitrage-free result.

A positive relationship between short term interest rates and stock prices is documented in Pakistan. Sign up for our newsletter.

However, using money supply, inflation, government bond rate and call money rate as explanatory variables in one study may bring about the problem of multicollineality. Accordingly, we have constructed this hypothesis as follow; H6: The first consists of an algorithmic analysis of the estimated covariance matrix of asset returns.

This increase in the number of 'factors' with outsized groups of equities cannot readily be explained by a distinction between 'priced' and 'non-priced' risk factors as it is impermissible to carry out tests on whether a given 'risk factor is priced' using factor analytic procedures.

The progress of models especially the APT appears to be influenced by the macroeconomic factors that intuitively affect capital investment. APT has caught on in financial practice as it allows for a more detailed and custom-made approach to portfolio risk management than the CAPM.

Moreover, the Breusch-Godfrey Lagrange Multiplier is reported. In addition, the assumption of homogeneous expectations is also open to doubt, because investors usually have divergent expectations, apply various investment holding periods, differ in respect of their decision-making processes and so on.

No arbitrage define that an individual holding a well diversified portfolio could not earn any additional return by only changing the weights of the assets included in the portfolio, holding both systematic and unsystematic risk remain constant.

Inflation is ultimately translated into nominal interest rate and an increase in nominal interest rates increase discount rate which results in reduction of present value of cash flows so it is hypothesized that an increase in inflation is negatively related to equity prices.

The article discusses tests of the two-parameter capital asset pricing model and attention focused on the asymmetry of realized asset, portfolio, and market return distributions.

On Generalized Arbitrage Pricing Theory Analysis: Empirical Investigation plex multi-factor models such as the arbitrage pricing the-ory (APT). It is well-known in the literature of finance that 2 Review of Related Models This section briefly reviews two close ancestors of the macroeconomics modulated independent state-space model.

Arbitrage Pricing Theory (APT) The APT is an alternate for the CAPM in that claim a linear connection flanked by assets estimated returns and their covariance through another unsystematic variables.

REVIEW OF LITERATURE. Capital Asset Pricing Model (CAPM) CAPM is a theory that was developed by William F. Sharpe in This theory Arbitrage pricing theory (APT) is a theory that was developed by Stephen A.

Ross in The APT model is also called a risk factor model. APT states that the expected. of factors whilst reviewing previous literature and research on the arbitrage pricing theory.

Case study on arbitrage pricing theory

Then, in Chapter 3, we discuss the linear regression model in greater detail, the problems associated with choosing such a model to test APT and explaining the importance of each.

Literature Review The empirical results regarding capital asset pricing model in finance literature are categorized into single factor CAPM and multifactor CAPM.

Introduction to Arbitrage Pricing Theories (APT) Arbitrage Pricing Theory 1. Theory of CAPM is very beautiful, but empirically not supported in more recent years 2. .

Literature review of arbitrage pricing theory apt
Rated 4/5 based on 38 review
The arbitrage theory of capital asset pricing Literature review