A Review of Country-level and Firm-level Factors in Arbitrage Pricing Theory and A Quick Test with Large Dataset

This study primarily reviews the studies that use Arbitrage Pricing Theory by separating the risk factors into two main groups as country-level factors and firm-level factors. Following this, this study examines the stock return determinants of emerging countries in two separate models; macro model and micro model to provide an empirical evidence on both country effects and firm-specific effects separately. The macro model is constructed to examine the relative importance of country effect in explaining cross-sectional stock variations. For that purpose the significance of 4 key macroeconomic variables –fundamental country characteristics-; money supply, exchange rate, inflation rate, and total reserve are tested. For micro model, 5 key firm specific variables, beta, book-to-market equity, earnings-to-price ratio, size and leverage are examined