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Arbitrage Pricing Theory: Evidence From An Emerging Stock Market

Author

Listed:
  • Javed Iqbal

    (PhD student at Monash University, Department of Econometrics & Business Statistics, Australia.)

  • Aziz Haider

    (MSc student (Final) Department of Statistics, University of Karachi, Pakistan.)

Abstract

The development of financial equilibrium asset pricing models has been the most important area of research in modern financial theory. These models are extensively tested for developed markets. This paper examines the validity of the Arbitrage Pricing Theory (APT) model on returns from 24 actively trading stocks in Karachi Stock Exchange using monthly data from January 1997 to December 2003. Explanatory factor analysis approach indicates two factors governing stockreturn. Pre-specified macro economic approach identifies these two factors as the anticipated and unanticipated inflation and market index and dividend yield. Some evidence of instability is found. The overall finding of two significant priced factors at least for a sub period supports APT for an emerging capital market.

Suggested Citation

  • 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.
    • Handle: RePEc:lje:journl:v:10:y:2005:i:1:p:123-139
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    References listed on IDEAS

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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