An Application of the Arbitrage Pricing Theory Using Canonical Correlation Analysis

Abstract

This paper demonstrates an application of the Arbitrage Pricing Theory using canonical analysis as an alternative to the conventional factor analysis. Following the traditional view that asset prices are influenced by unanticipated economic events, the systematic effects of the major composite economic indices on a wide spectrum of industry returns are explored. The main conclusion is that profitability may be considered as the single most important factor that influences security returns. Also, the composite lagging economic indicators appear to be more useful to investors in forming market expectations than the composite leading economic indicators. Finally, it is argued that the composite index of coincident economic indicators do not exhibit any significant influence in the pricing of capital assets.

Common factors in international securitized real estate markets

“…The main question to be addressed under this line of APT research is “if there are multiple factors affecting security returns, what might they be? “ Fogler, John and Tipton (1981), McGowan and Dobson (1993), Christofi, Chriostofi and Philippatos (1993) and Cheng (1995) apply these techniques and are able to establish a significant statistical and economic relationship between stock market returns and macroeconomic factors. Cheng (1998) employs the factor analytic technique and canonical correlation analysis to examine the international transmission mechanism of the UK and US stock market movements and the relationship between the UK and the US economic indictors.…”

Gold-oil-exchange rate volatility, Bombay stock exchange and global financial contagion 2008: Application of NARDL model with dynamic multipliers for evidences beyond symmetry

“…Another theoretical contribution is added to existing literature that there is the asymmetrical or nonlinear association between variables which are assumed to be linear by (Sahu et al, 2014;Shiva & Sethi, 2015;Tehreem, 2018;Keswani & Wadhwa, 2018;Neveen, 2018;Rajesh, 2019). Moreover, in existing literature few researchers have utilized arbitrage pricing theory to explain symmetrical connotations between macroeconomic fluctuations and stock indexes (Christofi et al, 1993;Günsel et al, 2009;Mollick & Nguyen, 2015;Saumya, 2012;Shahzad et al, 2017;Yan & Yang, 2016) while others have utilized EMH (Wickremasinghe, 2011;Hatemi-J, 2012;Singhania & Prakash, 2014;Othman et al, 2019). This research article has validated the arbitrage pricing theory and refuted a semi-strong version of an efficient market hypothesis by establishing an association between gold prices, oil prices, and currency value fluctuations but in a nonlinear way.…”

“…In the existing literature, some of the researchers have utilized the arbitrage pricing model (Christofi et al, 1993;Günsel et al, 2009;Mollick & Nguyen, 2015;Saumya, 2012;Yan & Yang, 2016), while other have utilized efficient market hypothesis as an underpinning theoretical model in order to explore symmetrical and asymmetrical linkages between Gold-Oil-Exchange rates and stock indexes (Floros & Vougas, 2008;Hatemi-J, 2012;Singhania & Prakash, 2014;Wickremasinghe, 2011). To the best of our knowledge, this is the first research article which is intended to answer the research question about the asymmetrical impact of international oil prices, gold prices, and exchange rate fluctuations on the Bombay stock exchange before and after the international economic recession of 2008 and over the entire duration from April 2003 to May 2020.…”