Abstract:
Purpose: The purpose of this thesis is to distinguish between efficient and inefficient
markets and check the validity and efficiency of Arbitrage Pricing Theory in these
markets (United States and Hong Kong).
Design /Methodology/Approach:In order to distinguish between efficient and
inefficient markets, Durbin Watson Autocorrelation tests were applied on 12 stock
exchanges name EUROPE, HONG KONG, INDIA, TAIWAN, AMSTERDAM,
MALAYSIA, UNITED STATES, CANADA, TOKYO, AUSTRALIA, AUSTRIA,
and SWITZERLAND. Furthermore, the efficiency was further checked through
comparison of the market and locally listed mutual funds. After the selection of Hong
Kong and United States Stock Exchanges, 10 macroeconomic variables (Inflation,
Short Term Interest Rate, Long Term Interest Rate, Exchange Rate, Money Supply,
Gold Prices, Oil Prices, Industrial Production Index, Market Return and
Unemployment Rate were tested upon so that the APT model could be constructed.
Tests like Normality and Multicollinearity were performed. Principle Component
Analysis was used to reduce the number of variables. After all the above mentioned
tests 4 variables were chosen to represent the APT in both the Hong Kong and United
States Stock Exchanges. Lastly OLS Regression was applied to study the effect of
these macroeconomic variables on the stock prices.
Results: The results showed that Hong Kong Stock Exchange was the most efficient
while United States Stock Exchange fell in the inefficient category. The efficiency of
APT was proven through the analysis of the value of R2. This value proved that when
similar model of APT is applied in two different stock exchanges, the results would
be more efficient in an efficient market like Hong Kong.
Originality/Value:This is the first attempt at constructing an APT Model based on
the economic conditions in one country, and applying the same model in a highly
efficient market; in order to relate the performance of APT with market efficiency.