Abstract
M. Comm.
For many years in finance literature and practice, the Capital Asset Pricing Model (CAPM)
has been recognised as the major framework for analysing the cross-sectional variation in
expected asset returns. The CAPM is structured on the belief that stock returns are influenced
by just one risk aspect of the macro economy, market fluctuation. With the market portfolio
at the centre of the CAPM, the critical point in employing the model is the estimation of the
true market portfolio. Thus, an imperfect approximation of the market portfolio leads to an
imperfect measure of the risk-return relationship. With this impediment of the CAPM, the
Arbitrage Pricing Theory (APT) of Ross (1976) has been proposed as an alternative to the
CAPM. Based on the premise that there are multiple factors that represent the fundamental
risks in the economy and involving no market portfolio, the APT has attracted a lot of
attention in finance literature. However, in contrast to the voluminous research in developed
markets relating stock returns to more than one source of systematic risk factors (multifactor
models), research in emerging markets is scant.
This study, conducted using an APT framework, investigates from a developing market
perspective the relationship between stock returns of JSE Limited-listed companies and pre-
specified macroeconomic variables of: economic activity, inflation, term structure and oil
prices. The analysis is conducted with monthly data from the South African stock market and
aggregate economy over the period January 2000 to December 2009. Following Chen, Roll
and Ross (1986), the study utilises the Fama and MacBeth (1973) two step procedure. Within
the scope of the methodology and data employed, the results of this study provide a different
perspective for South Africa from that found for the US by Chen et al. (1986). Consistent
with Martinez and Rubio (1989) for Spain and Poon and Taylor (1991) for the UK, the
findings of this study suggest that none of the risk factors found to be significant in Chen et
al. (1986) are priced in the South African case.