Arbitrage Pricing Theory Model Research Articles

Analysis of the Accuracy Level of the Balance Model in Stock Investment Prediction in the LQ45 Index

Objective –This study examines how the goal of an investor is to establish an optimal investment risk structure which maximizes profits by incurring fewer losses at a certain level of market risk. This research aims to determine the accuracy of the CAPM and APT models in predicting stock returns, as measured using Mean Absolute Deviation (MAD).Design/Methodology –The methods employed is a quantitative approach. The population for this study includes companies included in the LQ45 index during the 2020-2022 period consisting of monthly observations spanning from January to December. A purposive sampling technique was used to select 30 sample companies. The reason for using the LQ-45 index is because this index is an index in which there are 45 issuers. Apart from that, the shares included in the LQ-45 calculation are considered to reflect the movement of actively traded shares which will influence market conditions, consisting of shares with high liquidity and market capability, as well as growth prospects and fairly stable financial conditions.Results –The MAD calculation shows that the APT model is more accurate than the CAPM model. The choice of model use can be adjusted to the preferences of each investor. CAPM is a forecasting model that only uses market return factors, making it suitable for investors who want to predict stock returns easily and simply. On the other hand, APT can be used by investors who want to know in detail what macro factors influence changes in stock prices.Research Limitations/Implications – Increasing the length of time that researchers spend doing their research is recommended in order to improve the accuracy of their forecasts about future stock returns.Novelty/Originality –This instrument is highly beneficial for investors who are looking for a clear and effective technique to anticipate the returns on their stock investments. Investors who want a detailed grasp of the precise macroeconomic issues that affect swings in stock prices may find that applying the Arbitrage Pricing Theory (APT) is useful.

Comparative Analysis and Research of Investment Portfolio Management Models

Portfolio management plays a significant role in the world of finance and investing, offering benefits and contributions to both individual investors and institutions. Researchers use many mathematical models to make informed decisions about how to allocate and manage investments within a portfolio to optimize risk versus return trade-off based on the investors preference and constraints. This paper primarily employs the literature review methodology and comparative analysis methodology. Firstly, it collects, summarizes, and analyzes multiple papers on portfolio management models, including Markowiz Mean-Variance Model, Capital Market Line (CML), Arbitrage Pricing Theory (APT) and Capital Asset Pricing Model (CAPM) with the origin of the models, their key assumptions, components, and applications. Additionally, this paper also utilizes comparative analysis by comparing the similarities, differences, and respective downsides and benefits of the four main research models. Through this comparison, the paper investigates the relationships and application distinctions among the models. As a result, these models evolve and refine over time, with some building on others. CAPM extends the Markowitz Model by introducing the risk-free rate and market portfolio as benchmarks, simplifying the risk-return relationship, and introducing systematic risk. The Capital Market Line (CML), derived from CAPM, illustrates efficient portfolios made up of both market and risk-free assets and shows the risk-return trade-off. APT, a later model, can be seen as an extension of CAPM.

Calculating Expected Stock Return Using Arbitrage Pricing Theory Model and Analyzing Independent Variables That Affect Stock Expected Return (Analysis Conducted on Kompas100 Stock Issuers For The Period 2020 – 2022)

This study aims to determine which variabel independent (IHSG, USD exchange, money supply (M2), and inflation) that has the most influence of expected returns using Arbitrage Pricing Theory Model for selected stock issuers from the KOMPAS100 Index for the period 2020 – 2022. The population in this study are all stock issuers registered as members of the KOMPAS100 Index for the period 2020 – 2022 using a purposive sampling technique to obtain 57 selected stock issuers from the KOMPAS100 Index population for the period 2020 – 2022. Data on stock issuers who are members of the KOMPAS100 Index for the period 2020 – 2022 is taken from the doktorsaham.com website. The monthly stock price data for selected issuers and the monthly JCI stock data are taken from the Investing.com website. Monthly inflation data for the period 2020 - 2022 is taken from the BI.go.id website. Monthly data on the amount of money in circulation (M2), and monthly data on the USD exchange rate for the period 2020 – 2022 are taken from the satudata.kemendag.go.id website. Arbitrage Pricing Theory is used to calculate the expected return of a sample of selected stock issuers using the Microsoft Excel application. JASP application is used to test the hypothesis using Linear Regression.

Testing The Indonesian Stock Market Arbitrage Pricing Model

This research aims to explain the return and risk premium using an APT model from the Indonesian stock market. The study uses a two-stage regression model. This study uses a sample of stocks included in the Kompas100 index. The stocks included in Kompas100 represent the market capitalization value from the Indonesian stock market. The originality of this research is the inclusion of foreign macro-factors and the use of surprise or unanticipated factors in the Pre-specified Macro-economic Arbitrage Pricing Theory Model. The results prove that there is a multi-factor APT model consisting of The risk premium for inflation, the risk premium for interest rates, and the risk premium for foreign macroeconomic factors represented by the Dow Jones index and the Shanghai index. The results of this study further strengthen the theory and previous research on the multi-factor APT model.

Macroeconomic Factors and Stock Returns: An Approach of Arbitrage Pricing Theory in the Food and Beverage Industry

We examine the efficiency and efficacy of the Arbitrage Pricing Theory model in explaining stock returns in the food and beverage industry. To that end, we analyze the relationship between macroeconomic variables and stock returns before and during the pandemic. In this paper, we use unexpected changes in economic growth, inflation, interest rate, exchange rate, and crude oil price as generating factors and find that these factors have come to explain stock returns movement. Using the generalized least square (GLS) technique, we study stocks from 19 firms listed in Indonesia Stock Exchange over sixteen months from 2018 to 2021. While most significant relations are negative, some are significantly positive. The significant associations suggest that the theory is supported in that estimated expected returns depend on selected generating factors. The result also shows that investors are rational because they consider these factors as systematic risks influencing their profit. Furthermore, we find that there is a difference in stock returns before and during the pandemic, with the average being greater during the pandemic. We assume that this is due to investors’ choice to seek out safe-haven assets in order to limit their exposure to losses.

Macroeconomic Factors and Stock Returns: An Approach of Arbitrage Pricing Theory in the Food and Beverage Industry

We examine the efficiency and efficacy of the Arbitrage Pricing Theory model in explaining stock returns in the food and beverage industry. To that end, we analyze the relationship between macroeconomic variables and stock returns before and during the pandemic. In this paper, we use unexpected changes in economic growth, inflation, interest rate, exchange rate, and crude oil price as generating factors and find that these factors have come to explain stock returns movement. Using the generalized least square (GLS) technique, we study stocks from 19 firms listed in Indonesia Stock Exchange over sixteen months from 2018 to 2021. While most significant relations are negative, some are significantly positive. The significant associations suggest that the theory is supported in that estimated expected returns depend on selected generating factors. The result also shows that investors are rational because they consider these factors as systematic risks influencing their profit. Furthermore, we find that there is a difference in stock returns before and during the pandemic, with the average being greater during the pandemic. We assume that this is due to investors’ choice to seek out safe-haven assets in order to limit their exposure to losses.

Comparison Analysis Between Accuracy of CAPM and APT Models in Predicting Return of IDX-30 Stocks during Covid-19 Pandemic

This study is done to analyze and compare the accuracy of Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) Model in predicting stocks’ actual return. The purpose of the study is to find the discrepancy of accuracy of CAPM and APT models in predicting company stocks’ return registered in IDX-30 index from Indonesian Stock Exchange from January 2020-2022. The period is chosen because of the Covid-19 pandemic in Indonesia. The chosen stocks are the stocks which have positive return, never leave the index, never have any changes in stocks’ amount in major and minor evaluation, never do stock split, and have routine dividend payout along the study’s period. The result is there is a significant difference between CAPM and APT models in predicting the actual return based on the result from t-test independent samples. Observed from the Mean Absolute Deviation (MAD) of the two models, CAPM model MAD is smaller than those from APT model, thus CAPM is the more accurate model in calculating return form IDX-30 stocks from January 2020-2022.

Equity Market Performances: Evidence from South East, South West, Central and North East Asia Regions

This work takes a comprehensive look at the macroeconomics and equity market performances from the Asia perspective, using five indicators namely inflation rate (CPI), interest rate (IR), money supply (MS), exchange rate (ER), economic growth (GDP), against six equity market indexes of FBM KLCI (Malaysia), IDX (Indonesia), SENSEX (India), BIST-100 (Turkey), SSE (China), and Nikkei-225 (Japan) based on the framework of the Arbitrage Pricing Theory (APT). The annual data from 1988:2021 are sourced from World Bank, FRED of Federal Reserve Bank, and Central Bank Official website for selected countries. The analysis technique employed is Pooled Ordinary Least Square (POLS). The study established that all four variables which are CPI, IR, ER, and GDP are strongly significant with the actual direction in affecting the performances of six Asia stock exchanges. Our results confirm the economic theories and empirics that there are strong relationships between macroeconomic indicators and equity market performances in six Asia regions. The current study reveals new insights where a modified version of APT Model multi-factor is correctly specified when more than one variable is dominant, which suggests that all four independent variables are crucial in explaining the variation of the equity market performances in South East, South West, Central and North East Asia regions.

An Empirical Examination of VIX Market Fluctuations

Abstract This study investigates the impacts of the Standard & Poor’s (S&P) 500 Index, the NASDAQ Volatility Index (VXN), the spot prices of gold and silver, and the U.S. Dollar Index (DXY) on the CBOE Volatility Index (VIX). Specifically, the proposed arbitrage pricing theory (APT) model, programmed by Python, performs multi-factor regression analysis that analyzes the degree of impact measured by the beta coefficient of systematic risks on each factor. Our samples include daily transaction data from 2007 to 2018, divided into three periods to assess the VIX’s impact for each sub-period. The three periods are entitled as the “Global Financial Crisis Period” (2007–2009), the “European Debt Crisis Period” (2010–2012), and the “Follow-up Period” (2013–2018). Empirical results show that the major factors are the S&P 500 index and the VXN, with the DXY being a minor factor. Moreover, both gold and silver spot prices have a significant impact on the VIX. Keywords: VIX, Global financial crisis, European debt crisis, Systematic risk, Arbitrage pricing theory, Multi-factor regression model, Schwarz's inequality, Triangle inequality.

Arbitrage Pricing Theory and its relevance in modelling market

This research compares the Arbitrage Pricing Theory (APT) to the Capital Asset Pricing Theory (CAPT) by looking at numerous macroeconomic factors that affect market security prices and determining how APT explains the majority of the returns. The goal of this study was to look at the fundamental aspects (revenue, assets, liabilities, and growth potentials) in order to compute the intrinsic value based on the investor's risk tolerance. The BSE and NSE websites were used to get month-by-month secondary data over a period of ten years (2010–2020), which included the share price returns of TATA Motors and Eicher Motors as well as the BSE Auto Index. The statistics on GDP growth rate, inflation, and interest rates was obtained from the RBI's official website. The findings imply that the APT model accurately describes the majority of the company's share returns. Furthermore, it is clear that macroeconomic variables have a substantial impact on the risk of an asset over time and are one of the key inputs that financial analysts must consider when calculating expected returns. Furthermore, the sources of risk incorporated in a data set in an APT model inform the investor as to why certain stocks move in a particular direction.

Perspektif Asset Pricing Model dan Pengembangannya Pada Pasar Modal Indonesia

Every investor will pay attention to return and risk in investing in portfolios. In portfolio investment, this is known as the principle of high return high risk. To see this return and risk, 4 (four) models are known, namely 1) Capital Asset Pricing Model (CAPM) with beta factors (market risk), 2) French Fama models with beta, size and value factors, 3) Carhart model with factors beta, size, value and momentum, 4) the Arbitrage Pricing Theory (APT) model in this study, in addition to factors such as the model above, macro economic factors include economic growth, inflation, interest rates, the rupiah exchange rate against US dollars and the money supply. Models 1, 2 and 3 analyze from the fundamental side of the company while models 4 analyze from the macroeconomic side. Based on the theory of Ying (1966), Tauchen & Pitts (1983), Blume (1994), Lee & Swaminathan (2000), Gervais (2001) and Kaniel (2003) that the total trading volume affects the movement of stock indexes, stock prices and affects the magnitude of the level return and investment risk, then in this study the researchers added the total volume of activity factor as an effort to overcome the weaknesses found in the Carhart model where in calculations using the three sequential sort method, this model has not been able to record a holding period (the length of shares in the hands of investors) which in this study. The model with the addition of the total volume activity variable as a five factor pricing model is a model of the researcher's development. From the test results it can be concluded that the development model turned out to be better precision in estimating return and risk and its accuracy is more accurate than existing models.

Measuring Stock Market Predictability with Implications of Financial Ratios: An Empirical Investigation of Pakistan Stock Market

This paper investigates the financial ratios prediction on Stock Market Returns for Pakistan Stock Exchange. The research includes three financial ratios; Dividend Yield (DY), Earning Yield Ratio (EYR) and Book-to-Market Ratio (B/M); that have been observed through past researchers as predictors of Stock Market Returns. The theoretical framework is based on Arbitrage Pricing Theory and Capital Asset Pricing Model CAPM by Roll and Ross (1977) and Fama-French 3 factor (1992). Generalized Least Squares (GLS) is applied to estimate the predictive regressions, Cointegration runs are applied to evaluate the long-term relationship, and Generalized Methods of Moments (GMM) to measure the moments over the years and fluctuations in stock returns. The study results show financial ratios as strong predictor of stock return in Pakistan Stock Exchange, the GMM analyses reveal that the EYR has the higher predictive power than DY and B/M respectively. Furthermore, it is found that the financial ratios predictability is enhanced when ratios are combined in the multiple predictive regression models. The research findings are useful for the stock market investors to evaluate their decisions and for academic researchers to evaluate the stock market and investment predictability.

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

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.

Rating of LQ-45 stock index performance credibility in Indonesia Stock Exchange

This study aims to analyze stock performance credibility using the Capital Asset Pricing Model (CAPM) method, the Arbitrage Pricing Theory (APT) method, the Fama-French Three-Factor Model (FFTFM), and the 2013-2017 LQ-45 Stock Performance rating. The technique used for sampling is purposive sampling. The samples in this study are 23 companies. The results show that the CAPM model is more accurate in stock credibility assessment than the APT model and the FFTFM.

Dometi teorije arbitražnog vrednovanja

An important element of the positive portfolio theory which in addition to the Capital Asset Pricing Model (CAPM) provides an important contribution in terms of understanding the relationship between return and risk and pricing of assets in the capital market is the Arbitrage Pricing Theory (APT). This theory has been in focus of the economists for decades and is gaining advantage over the CAPM model in theory; however, not in practical terms. The paper aims to search for an answer to the question whether, after the four decades since the APT model has been introduced, there is a consensus in the financial literature on the validity and feasibility of this model in practice. The method of qualitative economic analysis, which allows us to draw valid conclusions on the researched issue based on studying the relevant literature, was applied in this paper. The general conclusion of the research is that the consensus on the key factors of the systematic risk has not yet been reached among economic theorists, researchers and practitioners, which would have eliminated the main deficiency of the APT model, ensured its validity and improved the applicability in practice. The lack of consensus on the most important systematic risk factors has been identified, thus indicating the limited scope of the APT model, which at the same time represents the main result of the research.

The Capital Assets Pricing Model & Arbitrage Pricing Theory: Properties and Applications in Jordan

This paper aimed to test the validity of capital asset pricing model (CAPM) and arbitrage pricing theory (APT) in Jordanian stock Market using three different firms of three main sectors, financial, industrial, and service sector for the period Q1 (2000) to Q4 (2016), using published information obtained from Amman stock exchange (ASE), these models were designed to measure the cost of capital using the coefficient of systematic risk factor, that used in the valuation of capital assets. We reviewed the most important similarities and differences between the two models out of sectors analysis. The study showed, first, there are some differences between the two models in term of the amount of systematic risk that can be eliminated by diversification in the three sectors. Second, the application of APT model showed that large percentage of risk can be eliminated by diversification more than CAPM model. Third, the banking sector in Jordan faces more systematic risks than other sectors.

Macroeconomic Factors and The Correlation of Stock and Bond Returns: Empirical Evidence from Kenya

This paper investigated how macroeconomic factors affect the correlation between stock and bond returns in Kenya over the past decade (July2006-Dec2015) using the Arbitrage Pricing Theory (APT) and Capital Asset Pricing Model (CAPM) framework for a time series of data. The study aimed to validate that the correlation of stock and bond returns could be explained by their common exposure to macroeconomic factors. The link between the stock-bond correlation and macroeconomic factors was examined using OLS regression model. With the empirical tests aimed at answering the following questions: How does inflation affect the correlation between stock and bond returns in Kenya? How do the interest rates affect the correlation between stock and bond returns in Kenya? How does money supply affect the correlation between stock and bond returns in Kenya? And how does the business cycle affect the correlation between stock and bonds? Secondary data obtained from the Kenya Central Bank, the Nairobi securities exchange and the Kenya bureau of statistics from July 2006 – December 2015 was analyzed. The empirical results confirmed that inflation rate, interest rate and business cycle do have a significant and positive influence on the stock-bond correlation. Money supply was found to have a negative influence on stock bond correlation in this study. The Ordinary Least Square Regression Model confirmed long run relationship between stock-bond correlation and the macroeconomic variables under review. The model was found to be robust because it passed all the diagnostic tests.

Re-examining the Chinese A-share herding behaviour with a Fama-French augmented seven-factor model

ABSTRACTIn view of the contradicting results in existing research, this article proposes a new weighted cross-sectional variance (WCSV) model to re-examine the level of herding behaviour in the Chinese A-share market. Motivated by the original WCSV model, we utilize a Fama-French augmented seven-factor model as the underlying Arbitrage Pricing Theory model, which introduces the trading volume and turnover rate factors to the Fama-French five-factor model. The regression results show the superiority of our new model compared to the WCSV model based on Fama-French three- and five-factor models, which implies that the empirical findings of herding with our WCSV model are more reliable in relative terms. In the empirical aspect, in addition to testing the herding level yearly and integrally, to provide further insight on the relationship between market stress and herding, we apply our model to the Chinese A-share herding behaviour within each of three well-known crisis periods. In addition, we also split the sub-samples into pre-crisis and post-crisis periods to detect the existence of asymmetric herding behaviour for different market directions. Our findings suggest that Chinese A-share herding behaviour is more prevalent during large market turmoil, especially under condition of down market.

Perbandingan Keakuratan Metode Capital Asset Pricing Model dan Arbitrage Pricing Theory dalam Memprediksi Return Saham (Studi pada Perusahaan Sektor Barang Konsumsi dan Sektor Pertambangan yang Terdaftar di Indeks Saham Syariah Indonesia (ISSI) Peri

CAPM is a balance model that can determine the risks and returns that investors will gain. Under the CAPM, the level of risk and the appropriate rate of return has a positive and linear relationship. The measure of risk that is an indicator affecting stock in CAPM is indicated by the variable β (beta). The bigger the β of a stock, the greater the risk it contains. This model links the expectation return rate of a risky asset with the risk of the asset in a balanced market condition. The population in this study is the stock price data of companies in the consumption sector and the mining sector listed on the Indonesia Sharia Sharia Index (ISSI) period 2013-2016. Based on the results of research and statistical tests, a more accurate model in predicting future ISSI stock returns is more accurate than the Arbitrage Pricing Theory (APT) model, because MADCAPM (0.0835) value MADAPT (0,5070). Furthermore, based on data processing with MannWhitney test shows that H0 is rejected, in the sense that there is a significant difference of accuracy between Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) in predicting ISSI stock return. This is evidenced by the significance value (Sig) (0.002) smaller than (α) 0.05.Keywords: Comparison, Accuracy, Capital Asset Pricing Model (Capm), Arbitrage Pricing Theory (Apt), Stock Return.

COMPARISON OF COMPANIES’ STOCK RETURNS BETWEEN CONSUMER SECTOR AND CONSTRUCTION SECTOR ON THE INDONESIA STOCK EXCHANGE

This research attempts to analyze risk and stock return of consumer sector and construction sector at Indonesian Stock Exchange. This research used the documentation method to collect the data. Data has been taken from Bloomberg Terminal. The sample is four corporations, with two corporations for each sector from 2011 until 2016. This research is using the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) for data analysis. Unfortunately, the Capital Asset Pricing Model (CAPM) has poor overall explanatory power, whereas the Arbitrage Pricing Theory (APT) model allows multiple sources of systematic risks to be taken into account and performs better than the CAPM, but both of the tests are considered. In regression analysis, the dependent variable used in the model is stock return. The result shows that inflation has insignificant effect on stock return. Furthermore, consumer sector has negative and significant effect on stock return. Conversely, construction sector has positive and significant effect on stock return.