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CAPM vs. APT with Macro Economic Variables: Evidence from the Indian Stock Market

This study compares CAPM and APT using macro economic variables to represent the APT factors. Analysis of 158 stocks listed on the Bombay stock exchange from 1991–2002 shows that stock returns are influenced by other variables in addition to the dominant market factor. Stock returns moved in the same direction as the BSE 200, production index, wholesale price index, dollar rate and difference in the six and three month foreign exchange forward premium. They moved in the opposite direction to call rates, T-bill rates, gold prices, three month foreign exchange forward premium, and differentials in long and short term interest rates. The significant factors varied with the period and interval used for calculation of returns. In the cross regressions, the BSE 200, call rate and dollar rate were priced in some sub periods. The multi index model using macroeconomic variables could also explain variation in returns marginally better than CAPM.