Test of Arbitrage Pricing Theory: Evidence from Indonesia

Abstract

This study uses quarterly data, from March 2009 to December 2013 on the 25 liquid stocks listed in the Indonesian Stock Exchange. The data are collected from the Indonesian Capital Market Directory and from the Indonesian Central Bank. The aims from this study are to investigate whether variations in stock returns are sufficiently explained by the Arbitrage Pricing Theory (APT). To achieve this objective, the study utilized four variables. In addition, the study uses prespecifying macrovariables approach and added gold price as an independent variable. The procedure used a two stage regression. The results indicate that the APT model is quite robust and only inflation and exchange rate have significant and negative effects on the variations in the stock. The theoritical contribution is developing APT which is right for Indonesia and the practical implication is an information for the government to make a policy based on the significant variables and for the investor to be able to consider what factors affect the return share and to prepare to overcome the effect.