Analysis of the Arbitrage Pricing Model on the Chinese Equity Markets

Arbitrage Pricing Theory as Applied to Chinese Equity Markets: An Econometric Analysis

James Long and Daniel Mao

龙近平 和 毛宁

International Student Dormitory

Fudan University

57 Wudong Road,Yangpu District

Shanghai 200433 P.R.C

2011/12/12

Econometrics

Professor Chen Shi-Yi

TESTS OF THE ARBITRAGE PRICING THEORY

USING MACROECONOMIC VARIABLES IN THE

CHINESE EQUITY MARKET

Table of Contents

1. Introduction

2. Theoretical Background

1. The arbitrage pricing theory

2. The factors of the APT

3. Data and Methodology

1. Chinese Equity Markets

2. Test Assets and Risk Factors

3.3 Test Methodology

1. Multiple regression

2. Problems associated with regression

3. Probit Analysis

4. Empirical Results

1. Descriptive Statistics

2. Regression Results

5. Conclusions

ANALYSIS OF ARBITRAGE PRICING MODEL APPLIED TO CHINESE EQUITY MARKETS

This paper tests the Arbitrage Pricing Theory of capital asset pricing in its application to the Chinese securities market just as it has been tested in developed countries such as the United States. In addition, a subsequent Probit Analysis is conducted against the macroeconomic variables to supplement the final results. A regression model is used to empirically test the interest rate, industrial output, exchange rate, and inflation statistics against the Shanghai Composite Index. The results suggest that the two of the macroeconomic variables have statistical significant influence on stock returns, while the other two do not. It will be shown that certain macroeconomic considerations do indeed have an influence on the returns of investment in the Chinese stock market, but the Arbitrage Pricing Theory cannot predict the direction or return of investments with any statistical...