UNIVERSITI PUTRA MALAYSIA
TESTING THE ARBITRAGE PRICING THEORY ON THE TEHRAN STOCK
EXCHANGE
POOYA SABETFAR
FEP 2011 19
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TESTING THE ARBITRAGE PRICING THEORY ON
THE TEHRAN STOCK EXCHANGE
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POOYA SABETFAR
DOCTOR OF PHILOSOPHY
UNIVERSITI PUTRA MALAYSIA
2011
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TESTING THE ARBITRAGE PRICING THEORY ON THE TEHRAN STOCK
EXCHANGE
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By
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POOYA SABETFAR
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Thesis Submitted to the School of Graduate Studies, Universiti Putra
Malaysia, in Fulfillment of the Requirements for the Degree of Doctor of
Philosophy
July2011
To
My dear Parents, who always like to see me in PhD degree,
My supportive husband Reza and,
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My Cute Son Eliya
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Abstract of thesis presented to the Senate of Universiti Putra Malaysia in fulfillment of
the requirement for the degree of Doctor of Philosophy
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TESTING THE ARBITRAGE PRICING THEORY ON THE TEHRAN STOCK
EXCHANGE
By
Chair: Cheng Fan Fah, PhD
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Faculty: Economics and Management
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July 2011
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POOYA SABETFAR
The equilibrium-pricing model using Arbitrage Pricing Theory (APT) has become one
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of the central models of modern financial theory. However, the APT is too general in
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determining the factors which influences expected returns. Many empirical studies on
the APT have already been conducted in free enterprise systems but, no attention has
been given in full Sharia compliant close economy. Since there was no previous
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research on the study of APT in full Sharia compliant sanction economy, an empirical
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support for the APT by employing macroeconomic variables in Tehran Stock Exchange
(TSE) which works in full Sharia compliant sanction economy was examined as the
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main objective of the research. However, this study identifies the macroeconomic
variables that may have significant high impact on the stock market returns in the
arbitrage pricing relationship. Also, this research aims to see whether economical and
financial sanctions adversely affect stock market returns. This study undertakes to
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identify the number of common factors, priced factors and the macroeconomic variables
that significantly affect on TSE by employing factor analysis with principal component
method from 1991-2008. Canonical Correlation Analysis (CCA) is also used to see
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effect of macroeconomic variables on stock returns in TSE. In this study, all the
procedure is done by using individual security and grouping according to different size
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of portfolios separately.
The evidence points to at least one factor to three factors that explain the cross-section
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of expected returns in TSE from 1991-2008. Financial and economical sanctions are
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affecting stock market returns and the negative sign of coefficients show the opposite
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reaction of investors to the announcement of sanctions in TSE. The principal
component analysis results suggest that there are four groups of macroeconomic
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variables in the test period that affect stock returns. According to CCA results in the
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samples, the sources of systematic risk in the period are export of the crude oil and
interest rate proxy in TSE.
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The results show the validly but, weak applicability of APT to estimate expected
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returns of the securities in full Sharia closed economy. Nevertheless, the
macroeconomic variables that influence stock market returns change over time in
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Iranian context. This probably is a typical aspect of sanctioned market. The results also
recommend the dissimilar strategies are needed to invest successfully in Iran because it
is more sensitive to sanctions and different macroeconomic variables.
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Abstrak tesis yang dikemukakan kepada Senat Universiti Putra Malaysia sebagai
memenuhi keperluan untuk ijazah Doktor Falsafah
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UJIKAJI TEORI ARBITRAJ HARGA KE ATAS BURSA SAHAM TEHRAN
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Julai 2011
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Pengerusi: Cheng Fan Fah, PhD
Fakulti: Ekonomi dan Pengurusan
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Model keseimbangan-harga dengan menggunakan Arbitrage Pricing Theory (APT) telah
menjadi salah satu model utama teori kewangan moden. Namun begitu, APT adalah
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terlalu umum untuk menentukan faktor yang mempengaruhi jangkaan pulangan. Banyak
kajian empirikal terhadap APT telah dijalankan dalam sistem perdagangan bebas tetapi
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tiada perhatian yang diberikan kepada ekonomi tertutup yang sepenuhnya mematuhi
Syariah. Memandangkan belum ada lagi kajian APT yang dilakukan terhadap ekonomi
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yang sepenuhnya mematuhi Syariah, kajian ini memenuhi jurang di dalam penyelidikan
dengan membawa objektif utama bagi membina sokongan empirikal untuk APT
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menggunakan pembolehubah ekonomi makro di Bursa Saham Tehran (TSE) yang
beroperasi di dalam ekonomi tertutup yang sepenuhnya mematuhi Syariah. Kajian ini
mengenalpasti pembolehubah makroekonomi yang mungkin membawa kesan ketara
yang tinggi ke atas pulangan di bursa saham di dalam hubungan harga arbitraj. Kajian
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ini juga bermatlamat untuk mengkaji samada sekatan-sekatan ekonomi dan kewangan
memberi kesan buruk kepada pulangan di bursa saham. Penyelidikan ini dilakukan
untuk mengenal pasti beberapa faktor umum, faktor harga dan pembolehubah ekonomi
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makro yang secara signifikannya mempengaruhi TSE dengan menggunakan analisis
faktor dengan kaedah komponen utama untuk jangkamasa dari tahun 1991 hingga ke
tahun 2008. Canonical Correlation Analysis (CCA) juga digunakan untuk melihat kesan
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pembolehubah ekonomi makro terhadap pulangan saham di TSE. Di dalam kajian ini,
kesemua prosedur dijalankan dengan menggunakan sekuriti individu dan berkumpulan
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secara berasingan mengikut saiz portfolio yang berbeza.
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Bukti menunjukkan sekurang-kurangnya terdapat antara satu hingga tiga faktor yang
menjelaskan lintas-bahagian jangkaan pulangan di TSE untuk jangkamasa dari tahun
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1991 hingga ke tahun 2008. Sekatan-sekatan kewangan dan ekonomi mempengaruhi
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pulangan di pasaran saham dan tanda angkali negatif menunjukkan reaksi berlawanan
pelabur terhadap pengumuman sekatan di TSE. Keputusan analisis komponen utama
mencadangkan bahawa terdapat empat kumpulan pembolehubah ekonomi makro dalam
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tempoh ujian yang mempengaruhi pulangan saham.
Berdasarkan keputusan-keputusan CCA terhadap sampel kajian, sumber risiko
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sistematik untuk jangkamasa kajian adalah eksport minyak mentah dan proksi kadar
faedah di TSE. Keputusan-keputusan kajian mengesahkan aplikasi APT yang lemah
untuk menganggarkan jangkaan pulangan sekuriti di dalam ekonomi tertutup yang
sepenuhnya mematuhi Syariah. Namun begitu, pembolehubah ekonomi makro yang
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mempengaruhi pulangan pasaran saham sentiasa berubah dari masa ke semasa di
Iran. Ini
mungkin
merupakan
aspek
umum
bagi
sesebuah
pasaran
yang
disekat. Keputusan-keputusan juga mengesyorkan bahawa strategi yang berbeza
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diperlukan untuk mendapatkan pelaburan yang berjaya di Iran kerana ia lebih peka
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terhadap sekatan dan terhadap pembolehubah ekonomi makro yang berbeza.
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ACKNOWLEDGEMENT
Many people assisted me in conducting this research that I could never
adequately thank them all. First and foremost, I would like to acknowledge my
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deepest gratitude to Associate professor Dr. Cheng Fan Fah, my supervisor for his
great considerations, invaluable comments, and keen suggestions throughout the study
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and preparation of the thesis. Special thanks and admiration are due also to the other
members of my supervisory committee, Professor Dr. Shamsher Mohamad, Associate
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professor Dr. Bany Ariffin and Associate professor Dr. Sazali Zainal Abidin for their
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helping and advanced insights into the study. I would also like to express my sincere
appreciation to Professor Dr. Mohammad Ariff and Associate professor Dr. Taufiq
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Hassan for their contribution on this thesis.
I would like to express my thanks to my family members, especially my mother and
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my brother, Sina, for their continual love and support over the years and for giving
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me the confidence in myself to go after my dreams. I love you.
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I would like to express my love to my husband, Reza, who have given me a peaceful
refuge whenever the problems of the thesis seemed beyond me. He has been a source of
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encouragement and support throughout this study and I wish to thank Reza for his love
and support. Last, but not least, I wish to express my thanks and love to my cute son,
Eliya, who at age four didn’t understand what Arbitrage Pricing Theory was but who has
tried to be patient when I retreated to my study to write the thesis. Thank you for being
my best friends.
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APPROVAL
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I certify that an Examination Committee met on 18 of July 2011 to conduct the final
examination of Pooya Sabetfar on her Doctor of Philosophy thesis entitled “ Testing the
Arbitrage Pricing Theory on the Tehran Stock Exchange” in accordance with
Universities and University college Act 1971 and the Constitution of the Universiti
Putra Malaysia [P.U.(A) 106] 15 March 1998. The Committee recommends that the
candidate be awarded the Doctor of Philosophy.
Members of the Examination Committee are as follows:
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Annuar b Md Nasir, PhD
Professor
Faculty of Economics and Management
Universiti Putra Malaysia
(Internal Examiner)
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Muzafar Shah Habibullah, PhD
Professor
Faculty of Economics and Management
Universiti Putra Malaysia
(Chairman)
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Law Siong Hook, PhD
Associate Professor
Faculty of Economics and Management
Universiti Putra Malaysia
(Internal Examiner)
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Rezaul Kabir, PhD
Professor
School of Management and Governance
University of Twente
The Netherlands, United Kingdam
(External Examiner)
-----------------------------------------------NORITAH OMAR, PhD
Assoc. Professor and Deputy Dean
School of Graduate Studies
Universiti Putra Malaysia
Date
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This thesis is submitted to the Senate of Universiti Putra Malaysia and has been
accepted as fulfillment of the requirement for the degree of Doctor of Philosophy. The
members of the Supervisory Committee were as follows:
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Cheng Fan Fah, PhD
Associate Professor
Faculty of Economics and Management
Universiti Putra Malaysia
(Chairman)
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Bany Ariffin Amin Noordin, PhD
Associate Professor
Faculty of Economics and Management
Universiti Putra Malaysia
(Member)
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Shamsher Mohamad Ramdili Mohd, PhD
Professor
Faculty of Economics and Management
Universiti Putra Malaysia
(Member)
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Sazali Zainal Abidin, PhD
Associate Professor
Waikato Management School
University of Waikato
Hamilton, New Zealand
(Member)
-----------------------------------------------HASSAN MOHD GHAZALI, PhD
Professor and Dean
School of Graduate Studies
Universiti Putra Malaysia
Date
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DECLARATION
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I declare that the thesis is my original work except for quotations and citations which
have been duly acknowledged. I also declare that it has not been previously, and is not
concurrently, submitted for any other degree at Universiti Putra Malaysia or at any other
institution.
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POOYA SABETFAR
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Date: 18 July 2011
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TABLE OF CONTENTS
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ABSTRACT
ABSTRAK
ACKNOWLEDGEMENT
APPROVAL
DECLARATION
LIST OF TABELS
LIST OF FIGURES
LIST OF ABBREVIATIONS
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INTRODUCTION
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Significance and Justification of the Study
1.5 Contributions of the Study
1.6 Scope of the Study
1.7 Plan of the Study
OVERVIEW OF IRAN ECONOMY, ISLAMIC ECONOMY
AND TEHRAN STOCK EXCHANGE
2.1
Introduction
2.2
Section One: Iran Economy
2.2.1 Overview of Iran Economy
2.2.2 Iran’s Economic Policy and Reform Effort
2.2.3 Iran’s Economic Sectors
2.2.4 Impact of World Sanctions on Iranian
Economy
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2.3
2.4
Section Two: Islamic Economy
2.3.1 The Sharia Law
2.3.2 Comparison Between Islamic Economy System and
Capitalism Economy System
2.3.3 Functions, Structure and Performance of a Stock
Exchange in an Islamic Economy
Section Three: Tehran Stock Exchange Market
2.4.1
Introduction
2.4.2
Definition of Stock Exchange Market
2.4.3
History of Stock Exchange Market In The World
2.4.4
History of Tehran Stock Exchange
2.4.5 Tehran Stock Exchange Market Before the Revolution
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2.5
2.6
THEORETICAL FRAMEWORK
3.1 Introduction
3.2 Theories and Methods of Estimation of Asset Pricing Model
3.2.1 Mean-Variance Theorem
3.2.2 Capital Asset Pricing Model (CAPM
3.2.3 Arbitrage Pricing Theory (APT)
3.3 The Comparison between the APT and the CAPM
3.4 General Disagreements and Contradictions of the APT
3.5 Methods of Analysis in APT
3.5.1 Macro-Economic Variables Model
3.6 APT Regression Methods
3.7 Concluding Remark
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METHODOLOGY
5.1 Introduction
5.2 Analysis Period
5.3 Criterion Variables
5.3.1 Selection of Macroeconomic Variables
5.4 Research Design
5.4.1 Factor Analysis and Principal Component Analysis
5.4.2 Test of the Arbitrage Pricing Theory
5.4.3 Canonical Correlation Analysis
5.5 Econometric Issues
5.5.1 Multicollinearity
5.5.2 Heteroskesdasticity
5.6 Hypothesis Generation
5.7 Concluding Remark
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RESULTS AND DISCUSSIONS
6.1 Introduction
6.2 Descriptive Statistics
6.2.1 Security Returns
6.2.2 Macroeconomic Variables
6.3 Factor Analysis
6.3.1 Sixty Individual Securities
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LITRATURE REVIEW
4.1 Introduction
4.2 Evidence and State of the Knowledge
4.3 Concluding Remark
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of Iran
2.4.6 Tehran Stock Exchange Market After the Revolution of
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Iran’s position between Middle East Regions
Concluding Remark
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6.3.2
6.3.3
6.3.4
6.3.5
6.3.6
Twenty Portfolios
Fifteen Portfolios
Ten Portfolios
Five Portfolios
Factor Analysis for Stock Returns
-Discussion
6.4 Principal Component Factor Analysis: A Discussion
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Number of the Common Factors
Cross-Sectional Regression of Mean Returns against Factor
Loadings
6.5 The Factor Structure of the Iranian Economy
6.5.1
Principal Component Scores of Iranian Economy in the
Period
6.5.2
Principal Component Scores of Iranian EconomyDiscussion
6.6 Relationship between Stock Market Returns and Macroeconomic
Variables
6.6.1
Canonical Correlation Analysis in the 17-Year Full Period
6.7 Concluding Remark
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SUMMERY, GENERAL CONCLUSION AND
RECOMMENDATION FOR FUTURE RESEARCH
Introduction
Main Finding
Limitation of the Study
Implications of the Study
Suggestion for Further Research
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7.1
7.2
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6.4.1
6.4.2
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REFERENCES
APPENDICESS
BIODATA OF STUDENT
LIST OF PUBLICATIONS
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