Economic Forces in the London Stock Market

Michael Beenstock () and Kam-Fai Chan

Oxford Bulletin of Economics and Statistics, 1988, vol. 50, issue 1, 27-39

Abstract: Empirical tests of APT have relied on factor analysis to estimate the risk factors. Here the authors propose a diff erent two-stage iterative methodology that relates risk factors to ex plicit economic variables. In the first stage, portfolio returns are regressed over time against these variables. In the second stage, a c ross-section regression is run across portfolios obtained in the firs t stage. The method is applied to 76 portfolios constructed from 760 securities traded on the London Stock Exchange between October 1977 a nd December 1983. Although experimental, four risk factors are identi fied: inflation, money supply, raw material prices, and interest rate s. Copyright 1988 by Blackwell Publishing Ltd

Date: 1988
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