The Validity of the Arbitrage Pricing Theory in the Jordanian Stock Market

This paper aims to test the validity and applicability of the Arbitrage Pricing Theory (APT) in Amman Stock Exchange (ASE) during the period 2001-2011. To achieve this objective, the study utilized six variables, four macroeconomic variables, i.e., interest-rate term structure, inflation, money supply and risk premium, and two market indicators i.e., dividend yield and productivity of the industry. Using ordinary least square method (OLS), the six variables against twelve industry portfolios of Amman Stock Exchange have been tested. Overall, the finding of the paper support the validity and applicability of APT in ASE, as the results show that four out of the six tested variables, are able to explain 84% of the change in the stock returns of the Jordanian industrial firms during the study period. Another finding of this paper is that the effect of the tested variables varies among industries.