Arbitrage Pricing Theory
TEST OF ARBITRAGE PRICING THEORY ON THE NIGERIAN STOCK EXCHANGE
1.0 INTRODUCTION
The two major theories on equilibrium pricing of securities are Capital Asset Pricing Model (CAPM) developed by Sharpe (1964), Lintner (1965) and Mossin (1966) and the Arbitrage Pricing Theory (APT) developed by Ross (1976). CAPM suggests that only non-diversifiable risk influences security returns. The Arbitrage Pricing Theory (APT) does not restrict security return to market risk but to many micro and macro-economic factors influencing stock returns. Moreover, theoretical considerations relate variability in expected rate of return to some macroeconomic variables. Thus, APT gives a better justification for returns than other market proxies (Elton, Gruber and
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They employed a two-stage regression model and found that little was moving in moving from Factor Analysis Model to the Macroeconomic Variable Model and the (MVM) appears to be a better model when the two models were tested against a proposed sample or against a test period.
Van Rensburg (2000) investigated the Chen, Roll and Ross (1986) pre-specified variable procedure to priced APT identification on the Johannesburg Stock Exchange (JSE) using the Vector Autoregressive Regression (VAR).
Mohseni (2007) tested the APT on selected firms in the Tehran Stock Exchange using the Fama and Macbeth (1973) models using monthly data. Money supply and oil Prices were the two risk factors used for these groups of firms and the sensitivity of each firm’s return was estimated by the factors. The research evidence provides that APT model was significant in explaining the returns on his selected sample of firms.
3.0 METHODOLOGY AND DATA
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& Ross, S.A. (1986) Economic Forces and the Stock market. Journal of Business, 59, 1, 383-403.
Connor, G. & Korajczyk, R. (1986) Performance Measurement with the Arbitrage Pricing Theory. A New Framework for Analysis. Journal of Financial Economics, 15, 373-394.
Elton, E.J., Gruber, M.J. & Blake, C.R. (1995) Fundamental Economic Variables, Expected Returns and Bond Fund Performance. Journal of Finance, 1, 4, 1227-1256.
Fama, E.F. & Macbeth, J. (1973) Risk, Return and Equilibrium: Empirical Tests. Journal of Political Economics, 81, 3, 607-636.
Gehr, A. Jr. (1978) Some Tests of Arbitrage Pricing Theory. Journal of Midwest Finance Association, 91-105.
Kryzanowski, L. & To, M. (1983) General Factors Models and Structure of Security Returns. Journal of Financing and Quantitative Analysis, 18, 31-52.
Lintner, J. (1965) The Valuation of Risk Assets & the Selection of Risky Investments in Stock Portfolios and Capital Budgets. Review of Economics and Statistics, 47, 2, 13-37.
McElory, M.B., Burmeister, E. & Wall, K.D. (1985) Two Estimators for the APT when Factors are Measured. Economic Letters, 19, 271-275.
Mohseni, G.H. (2007) How we can Test APT? Journal of Economic Investigation, University of Tehran, 19,
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