Empirical Testing of the APT Model with Pre-Specifying the Factors in the Case of Romanian Stock Market

Abstract

Since the discovery and the development of the financial equilibrium asset pricing models, they were constantly and repeatedly tested mainly for the big markets and scarcely for the smaller or the emerging ones. Romania belongs to the last category, hence empirical testing of these models for its case was almost inexistent. So, this paper examines the validity and the applicability of the Arbitrage Pricing Theory model for the Romanian stock exchange, conditioned of course by the available data. The data used is represented by monthly returns of 60 companies, listed on the Bucharest Stock Exchange, using a 6-year period, from 01.01.2005 to 31.12.2010. The pre-specifying of possible economic factors method was implied, using a total of 16 economical variables, among which some were used also in the more famous studies, and the rest were added. The obtained results show as significant for influencing assets’ return a number of 4-6 variables with respect to the testing approach, but of course the conclusions can be subdued to potential errors, they are not exhaustive and can surely be improved.
Keywords: APT, Bucharest stock exchange, Factor loadings, Multiple regressions, Pre-specifying factors.