Arbitrage Pricing Theory Research Articles

View Fusion Vis-à-Vis a Bayesian Interpretation of Black–Litterman for Portfolio Allocation

The Black–Litterman model extends the framework of the Markowitz modern portfolio theory to incorporate investor views. The authors consider a case in which multiple view estimates, including uncertainties, are given for the same underlying subset of assets at a point in time. This motivates their consideration of data fusion techniques for combining information from multiple sources. In particular, they consider consistency-based methods that yield fused view and uncertainty pairs; such methods are not common to the quantitative finance literature. They show a relevant, modern case of incorporating machine learning model-derived view and uncertainty estimates, and the impact on portfolio allocation, with an example subsuming arbitrage pricing theory. Hence, they show the value of the Black–Litterman model in combination with information fusion and artificial intelligence–grounded prediction methods.

TEST OF ARBITRAGE PRICING THEORY ON STOCK INDICES: AN EMPIRICAL STUDY ON BIST100

The Arbitrage Pricing Theory (APT), based on arbitrage theory, emphasizes that a market can rebalance itself After the occurrence of an arbitrage opportunity. This capability of financial markets confirms the Arbitrage Pricing Theory. This study tests the validity of APT on the Istanbul Stock Exchange between the period of January 2009 and March 2020 on BIST100. Purposing to determine the relationship between security returns and other macroeconomic factor, it will serve as a compass for other emerging countries. With stock return factor as independent variable, this study uses a Vector Error Correction Model (from the VAR family model) with five macro-economic factors: GDP, interest rate, inflation rate, exchange rate and the countries’ production indexes. The resulting model depicts a negative Error Correction Term (ECT) which indicates the validity of the model in the Turkish stock exchange.

Accuracy of Capital Asset Pricing Model and Arbitrage Pricing Theory in Predicting Stock Return

The process of predicting the stock return is considered the main challenge confronting the financial analyst and the investment decision-maker in particular. The objective of the study aims at testing the ability of both CAPM model and APT theory in predicting the stock return. The study investigated a sample of 10 banks listed in the Iraq Stock Exchange for the period (2012-2021). A variety of appropriate statistical and financial means and tools were employed. The study results in many conclusions including the rejection of the study hypotheses and the acceptance of alternative hypotheses based on the analytical results, and then there is a difference in the required rate of return calculated according to each of CAPM model and APT theory as well as the actual return.

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.

Implication of efficient market hypothesis and arbitrage pricing theory in Chepkube market at the Kenya-Uganda border: A critique of literature review

Essentially, a market is the only point of convergence where actual exchanges betweenknowledgeable willing buyers on one hand and innovative creators of goods and services happen,and the end product is wealth, money and profit. The Efficient Market Hypothesis (EMH) isfounded on the premise that it is impossible to “beat the market” because market efficiencycauses existing asset prices to always incorporate and reflect all relevant information. In anefficient capital market, the security prices reflect all the available information, and excess returnis not possible by trading on the basis of new information. Markets are broadly broken into twocomponents: markets for goods and commodities as well as the money markets. The ArbitragePricing Theory is an asset pricing model that explains the cross-sectional variation in assetreturns or prices. This study analyses the applicability of both EMH and APT theories inChepkube; largely a goods and commodities market located at the Kenya-Uganda border in EastAfrica. Desk research methodology was used for this study. The study interrogates the existingliterature in eliciting the required information necessary for the research findings. The researchfindings suggest that only the weak and semi strong form of EMH exists at Chepkube while theAPT in its simplest form dominates the market trends as brokers seize, create, and controlpertinent information. The results provide customers, entrepreneurs, SMEs, researchers,financiers, government regulators and other interest groups with insights on efficient markets; aswell as opportunities for further empirical research.

Market Beta is not dead: An approach from Random Matrix Theory

In the 1980s, the first doubts about the validity of the Sharpe Single Index Model to explain the cross-sectional expected returns of financial assets appeared. Since then, the financial literature has proposed a wide variety of new factors, while many empirical studies have tried to determine their plausibility. In this paper, we present a new approach from the Random Matrix Theory to determine if the Arbitrage Pricing Theory models are better than the Sharpe Model to explain the cross-sectional expected returns. We will show that, except for periods of high volatility, just one factor is significant in the sample. We will also prove that this factor is the Market one.

Analysis of Expected Stock Returns in 2020 - 2022 Using Arbitrage Pricing Theory (Study on Stocks Incorporated with The IDX-30 Index on The Indonesia Stock Exchange)

This study aims to determine which IDX-30 member stock issuers have the highest expected return values in 2020, 2021, and 2022, and macroeconomics which have a high influence on the expected returns of IDX-30 member stock issuers in 2020, 2021, and 2022. The population in this study is all stock issuers who are registered as IDX-30 members in 2020, 2021, and 2022, and the stock data taken is the issuer's stock data from 2020, 2021, and 2022. Stock price data and prices The JCI index is taken from the Investing.com website, and data on stock issuers who are members of the IDX-30 2020 – 2022 are taken from the doctorsaham.com website. Bond data is obtained from the KSEI website. Inflation data and USD exchange rate data taken are monthly data from December 2019 – December 2022. Inflation data is taken from the BI.go.id website, and USD exchange data is taken from satudata.kemendag.go.id website. The sample in this study is all members of issuer shares who consistently join as IDX-30 members in 2020, 2021 and 2022. The number of IDX-30 samples in 2020 is 27 issuers of shares, in 2021 there are 26 issuers of shares, and in 2022 there are 26 stock issuers. Calculating expected stock returns using the Arbitrage Pricing Theory, and ranking expected stock returns is done in the Microsoft Excel application, and Linear Regression is used to test the hypothesis in the JASP application

A Literature Study on the Capital Asset Pricing Model

Capital Asset Pricing Model (CAPM) is an important theory in financial economics. It was based on Markowitz's Modern Asset Allocation Theory (MPT) and proposed by Sharpe. This model expresses the relationship between risk coefficient, asset return rate, and systematic risks by simple mathematical formulas. The model has four advantages, handling of risks when evaluating investment behavior, accuracy when estimating equity capital, relatively reliable and better than Weighted Average Cost of Capital (WACC) in investment evaluation. CAPM also has some weakness, consisting of variables and application in investment evaluation. There are three variables in CAPM model, risk-free rate of return, equity risk premium and beta. The weakness about application in investment evaluation shows that in beta of projects and firms are different, complex restructure and periods. The Arbitrage Pricing Theory (APT) can be an option of CAPM, and it is a more flexible and complex model compared with CAPM. However, the latest research proves that Portfolio Theory has very big problems. High-risky assets do not necessarily have high returns. This view may be embodied in "low-risk anomalies" and "Idiosyncratic Volatility". In the future, researchers will introduce more elements for CAPM to improve accuracy, or develop new models.

Testing for Alpha in Linear Factor Pricing Models with a Large Number of Securities

Abstract This article considers tests of alpha in linear factor pricing models when the number of securities, N, is much larger than the time dimension, T, of the individual return series. We focus on class of tests that are based on Student’s t-tests of individual securities which have a number of advantages over the existing standardized Wald type tests, and propose a test procedure that allows for non-Gaussianity and general forms of weakly cross-correlated errors. It does not require estimation of an invertible error covariance matrix, it is much faster to implement, and is valid even if N is much larger than T. We also show that the proposed test can account for some limited degree of pricing errors allowed under Ross’s arbitrage pricing theory condition. Monte Carlo evidence shows that the proposed test performs remarkably well even when T = 60 and N = 5000. The test is applied to monthly returns on securities in the S&P 500 at the end of each month in real time, using rolling windows of size 60. Statistically significant evidence against Sharpe–Lintner capital asset pricing model and Fama–French three and five factor models are found mainly during the period of Great Recession (2007M12–2009M06).

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.

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

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

Analisis Keakuratan Capital Asset Pricing Model Dan Arbitrage Pricing Theory Dalam Memprediksi Return Saham (Studi Pada Perusahaan LQ 45 Di Bursa Efek Indonesia Periode 2016-2020)

This study is based on the rapid development of the investment world. Hence, most investors have limited abilities and strategies in investing, therefore it takes important methods and concepts to assess the level of profit from an investment with various existing risk factors. This study focuses on the comparison of the accuracy between the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) methods in predicting stock returns of LQ 45 index companies for the 2016-2020 period. This study aimed to determine which method was more appropriate in predicting the company's stock returns. The accuracy of the CAPM and APT methods was measured by using the Mean Absolute Deviation (MAD). The Independent Sample T-test was used to determine whether there was a difference in accuracy between the CAPM and APT methods in predicting stock returns. The results of this study show that by using the calculation of the Mean Absolute Deviation, the APT method is more accurate than the CAPM method in predicting stock returns. The MAD APT value (0.000246) is smaller than the MAD CAPM value (0.003739) and based on data processing from the Independent Sample T-test shows that H0 is rejected, which means that there is a significant difference in accuracy between the CAPM and APT models particularly in predicting the company's stock return.

Moderation Of Percapita Income On Macroeconomic Effects On Stock Return

Arbitrage Pricing Theory is a theory that has been tested by various researchers, the majority of the results show a similarity, namely asset pricing can be predicted by looking at macroeconomic indicators. The ever-changing macroeconomy results in investors' profits in making investments also changing, on that basis it is necessary for investors to properly adjust to macroeconomic conditions in making investment decisions. Interestingly, empirically it shows that there are differences in patterns of influence in emerging market countries and in developed countries, this encourages researchers to prioritize the moderating variable, namely per capita income. This study uses macroeconomic data, per capita income, and stock returns in Indonesia during 1998-2020. The results of the study show that with moderation of per capita income there is an increase in the effect of macroeconomics on stock returns. This indicates that investors also need to study the development of per capita income in Indonesia, as an effort to increase optimal returns.

The Effect Of Money Supply And Interest Rate On Stock Price

Research on stock prices is an important aspect in the development of financial management studies, because it has an impact on scientific perspectives and is able to become a practical study for investors in making investment decisions. Interestingly, various studies show different results regarding the effect of macroeconomics on stock prices, both by sector, country classification, and study period. This study aims to examine more generally using the composite stock price index in analyzing macroeconomic effects on stock prices. The research period is used during 2000-2020, using the money supply and interest rates as macroeconomic variables in Indonesia and Malaysia. The results of the study show that both the money supply and interest rates have an influence on stock prices in Indonesia, while research in Malaysia shows that only interest rates have an influence on stock prices. Research in two emerging market countries shows different patterns of influence, this shows that Arbitrage Pricing Theory has different patterns of influence.

Investor base, cost of capital, and new listings on the NYSE

Investor base, cost of capital, and new listings on the NYSE

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.

The Fama-French five-factor model and the US-China trade war: An empirical investigation of the Indonesia, US, and China stock market

Despite numerous studies of the US and China trade war effect being published over the last seven years, this topic has remained equivocal. The portfolio formation model that underlies the arbitrage pricing theory is still relatively small, especially for the portfolio performance of the Fama-French five factors (5FF) model that examines the global economic crisis. Focusing on the trade war year, the study aims to examine the effect of accounting information on portfolio performance by using the 5FF model. This study employs a dummy panel least square regression model, the data are analyzed from Indonesia, US, and China stock markets with 864 portfolio monthly combinations ranging from 2016 to 2019. The result of the study shows that the US-China trade war strengthens the beneficial impact of market risk on portfolio performance in the Indonesian Stock Exchange. On the other hand, the war has no impact on the relationship between market risk and the performance of a portfolio of US stocks. However, it lowered the beneficial impact of size on portfolio performance for both the US and China stock markets. The robust 5FF of accounting information within the study is size and investment. According to the study, systematic risk and idiosyncratic risk should be given more consideration by both investors and companies to prevent unneeded economic losses and manage the risk that could have a greater impact on the stock market.