Abstract
The purpose of this paper is to test the Arbitrage Pricing Theory (APT) using monthly data for Finnish and Swedish stock returns during the 1977–1986 period. The first stage involves estimating the systematic risk components for each asset using factor analysis. The second stage involves testing if the number and structure of factors which influence the security returns remain unchanged across various time periods and across different samples in the two Scandinavian countries. For this purpose, a new method called transformation analysis is introduced. Empirical evidence indicates that two or three common factors in these two neighbouring countries can be found.
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