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- Title
A TEST OF THE APT IN PRICING UK STOCKS.
- Authors
Abeysekera, Sarath P.; Mahajan, Arvind
- Abstract
This paper empirically tested two hypotheses in order to evaluate the validity and applicability of the APT to the UK stock market using monthly individual price data from the LSE. Results obtained in this study support the first hypothesis (HI) that the risk free rates are equal to the corresponding estimated intercept terms of the models tested. As this inference could have resulted from weak test methodology, another set of tests was conducted to see if the intercept terms were equal to zero. The earlier inference was supported due to the finding that the intercept term was significantly different from zero. However, the results of testing the second hypothesis (H2) utilizing two different procedures (i.e., the Chi-square test and the t-test) show that the risk premia are not significantly different from zero. This latter finding does not support the APT and is in conflict with the results of Hughes (1982) with regard to the Canadian stock market and several other studies (e.g., Gehr, 1975; Roll and Ross, 1980; and Chen, 1983) based on US stock market data. Given the mixed results obtained in this study, no conclusive statements can be made regarding the validity and the applicability of the APT to the capital markets of the UK. It should be noted that the results of previous tests of the APT using US and Canadian stock market data are also mixed at best." The results obtained in this study and in the previous studies do not provide any conclusive evidence either to accept or reject the APT. Further research is required before any conclusive judgement is passed on this theory which appears to have great potential.
- Publication
Journal of Business Finance & Accounting, 1987, Vol 14, Issue 3, p377
- ISSN
0306-686X
- Publication type
Academic Journal
- DOI
10.1111/j.1468-5957.1987.tb00101.x