Arbitrage Princing Theory and test of its applicability in İstanbul Stock Exchange

m ABSTRACT ARBITRAGE PRICING THEORY and TEST OF IT'S APPLICABILITY IN ISTANBUL STOCK EXCHANGE Arda SÜRMELİ İşletme Anabilim Dalı Anadolu University, Graduate School of Social Sciences, Agust 2004 Supervisor: Prof. Dr. Nurhan AYDIN Arbitrage Pricing Theory which assumes that asset returns are affected by more than one risk factor is not only explained theoretically but also tested by using monthly data in ISE during the January 1998 - March 2004 period. Multi Variable Linear Regression Analysis is adopted for testing methodology. 7 macroeconomic risk factors such as import/export ratio, industry production ratio, gold prices, foreign exchange rates, real interest rates, current balance account and M2 are included as explanatory variables into the Arbitrage Pricing Model. Using monthly data for this period it is found that no macroeconomic risk factors has statistically significant effect on asset returns therefore the validity of APT in ISE is rejected.