Economic Forces and Stock Markets under Arbitrage Price Theory: Empirical Evidence from Turkey

Abstract

Our aim is to identify common risk factors among some pre-determined macroeconomic variables in a way that whether they are presented significant risk premiums in pricing equation that was given above. First we identified number of potential factors explaining returns in Turkish markets as suggested by Ross (1980) when presented APT. We found two factors were significantly explaining returns and then to find out which factor they are. we have used methodology of Chen, Roll, Ross (1986) where we have ranked portfolios according to size (market capitalization) and portfolio returns are calculated as log-returns. Our main results have showed that stock returns are exposed to systematic economic news that they are priced in accordance with their exposures. Those variables in our study are MP, DEI, BIST 100, BIST 30 and CG that must be given importance for considering their impact on stock returns.

Keywords: Arbitrage Pricing Theory, Factors Analysis, Economic Forces, Macroeconomic Factors