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An empirical investigation of the arbitrage pricing theory in a frontier stock market: evidence from Bangladesh

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  • FARUQUE, MUHAMMAD U
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    Abstract

    Although the existing literature of Arbitrage Pricing Theory (APT) on different categories of stock markets is vast, it is non-existent in the case of frontier stock markets (defined as very small capital markets). This paper fills this gap by investigating how APT performs in a frontier stock market. To address the common problem of multi-collinearity in macro variables, this study uses principal component analysis (PCA) as a robustness check on the previous results. The results confirm evidence of one significant macroeconomic factor in the Dhaka stock market - a frontier stock market of Bangladesh. This result is comparable to that of some emerging (larger than frontier markets) stock markets.

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    File URL: http://mpra.ub.uni-muenchen.de/38675/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38675.

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    Date of creation: 01 Jun 2011
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    Publication status: Published in Indian Journal of Economics and Business 04.10(2011): pp. 443-465
    Handle: RePEc:pra:mprapa:38675

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    Keywords: Key words: Arbitrage pricing theory (APT); Capital-asset pricing model; Dhaka stock exchange (DSE); Principal component analysis; Principal components (PC); Efficiency market hypothesis (EMH) and Chen; Roll and Ross (CRR);

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