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Arbitrage Pricing Models for two Scandinavian stock markets

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  • Östermark, R

Abstract

This paper examines the Arbitrage Pricing Models (APM) for Finnish and Swedish data. The testing is based on weekly returns of portfolio-aggregated data, partly to achieve multivariate normality, partly to dampen outlier effects. Data of beta-ranked portfolios used elsewhere in testing the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) are used here too and provides a convenient basis for dominance testing of CAPM and APT. Following Chen, the dominance relationship is analyzed by the Davidson-Mackinnon test and the Posterior Odds Ratio test. The tests indicate that APT dominates CAPM in both countries. The Finnish loadings turned out to be more volatile than the Swedish. Furthermore, the multiple factor model is seen to have relatively more power in Finnish than in Swedish conditions. The results are consistent with previous evidence, that the single factor model (CAPM) tends to be more powerful in explaining Swedish than Finnish stock returns. Since the testing is based on portfolio-aggregated weekly returns series, the results do not necessarily agree with those for daily returns at the individual asset level.

Suggested Citation

  • Östermark, R, 1989. "Arbitrage Pricing Models for two Scandinavian stock markets," Omega, Elsevier, vol. 17(5), pages 437-447.
    • Handle: RePEc:eee:jomega:v:17:y:1989:i:5:p:437-447
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    Cited by:

    1. Martikainen, Teppo & Perttunen, Jukka, 1991. "Return intervals, systematic risk estimates and firm size : Empirical evidence from a thin security market," Economics Letters, Elsevier, vol. 36(3), pages 311-315, July.
    2. Javed Iqbal & Aziz Haider, 2005. "Arbitrage Pricing Theory: Evidence From An Emerging Stock Market," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 10(1), pages 123-139, Jan-Jun.

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