Application of the Arbitrage Pricing Theory Using Macroeconomic Variables in the Tehran Stock Exchange

The purpose of this research is to investigate the application of the arbitrage pricing theory and effect of unanticipated changes in a set of macroeconomic variables such as inflation rate, money supply, exchange rate, oil price, risk premium and Gross domestic Product on expected security return in Tehran stock exchange. In this research, data are analyzed monthly by using of the system of iterated seemingly unrelated regressions for the period of 1999-2009(120 months). The results indicate that risk premium associated with unanticipated changes of variables of risk premium and oil price are significant at the 5% level and the restrictions of the APT places on an unrestricted linear factor model. Therefore, the arbitrage pricing theory is a reasonable model for explaining of expected security return and the significant macroeconomic variables are sources of systematic risk in Tehran stock exchange.