An Empirical Examination of the Arbitrage Pricing Theory: Evidence from Jordan

Abstract: Investors in the stock market need a valid and accurate model to predict the expected rate of return on their portfolios which necessitate testing many pricing models and determining which model is the most accurate. The problem is that both single-factor and multi-factor capital asset pricing models (CAPM) are not valid for predicting the expected rate of return. The purpose of this quantitative study was to test the validity of the arbitrage pricing theory (APT) in the Jordanian stock market as an alternative to the CAPM. The study was theoretically based on the arbitrage pricing theory introduced by Stephen Ross. The main focus of the research questions was on examining the relationship between stocks' rate of return calculated using the price index of Amman stock exchange (ASE) and a set of macroeconomic variables. The website of ASE, central bank of Jordan, and department of statistics were used to collect data about ASE price index and the independent macroeconomic variables of unemployment rate, gross domestic product (GDP), industrial producers' price index (IPPI), and exports for the period from 2000 to 2016. Collected data were analyzed using multiple-linear regression. Due to the detected multicollinearity between GDP and exports, GDP was excluded from the proposed model. The results revealed that among three variables tested, only IPPI had a significant negative effect on the stocks' rate of return.