International Arbitrage Pricing Theory: An Empirical Investigation





    Search for more papers by this author
    • Graduate School of Business, University of Wisconsin-Madison; College of Business and Management, University of Maryland; and Graduate School of Business, University of Wisconsin-Madison, respectively. The authors are grateful to Richard Roll, Mark Weinstein, Jay Shanken, Vihang Errunza, Alan Shapiro, and an anonymous referee for valuable comments and to Sung Oh for computational assistance. Cho is grateful for research support provided by the Graduate School of the University of Wisconsin-Madison. Senbet acknowledges support from Dickson-Bascom professorship. Earlier versions were presented at the 1984 American Finance Association meetings and the 1985 Western Finance Association meetings.


In this paper, we test the arbitrage pricing theory (APT) in an international setting. Inter-battery factor analysis is used to estimate the international common factors and the Chow test is used in testing the validity of the APT. Our inter-battery factor analysis results show that the number of common factors between a pair of countries ranges from one to five, and our cross-sectional test results lead us to reject the joint hypothesis that the international capital market is integrated and that the APT is internationally valid. Our results, however, do not rule out the possibility that the APT holds locally or regionally in segmented capital markets. Finally, the basic results of both the inter-battery factor analysis and the cross-sectional tests are largely invariant to the numeraire currency chosen.