Khairy Ali Mostafa Elgiziry¹, Mai Mostafa Awad^2,

Following the introduction of the Arbitrage Pricing Theory (APT) to the literature by Steven Ross in December 1976, a huge number of empirical studies were carried out aiming to test the Arbitrage Pricing Theory and to explain the relationship between the market risk and the market return in different stock exchanges around the world during different time periods. The main objective of this paper is to test the Arbitrage Pricing Theory (APT), which allows multiple sources of systematic risks to be taken into account, in the Egyptian Stock Exchange by using the Principal Component Analysis. For this purpose, the monthly return of all the shares included in the EGX30 index from January 2007 to December 2013 of the Egyptian Stock Exchange is used as the dependent variable. The explanatory variables are growth rates of the value added of Industrial production, Consumer price index (inflation rate), Money supply (M1), Short-term interest rate, Discount rate, Exchange rate of the Egyptian pound with the US$, Price of Brent crude petroleum, and the market Index (EGX100). The results show that only the growth rates of Consumer price index (inflation rate), and Price of Brent crude petroleum have significant influence on the stock return and thus will be included in The Egyptian Arbitrage Pricing Model. Overall, the results suggest validity but weak applicability of APT in the Egyptian Stock Exchange over the study period.

arbitrage pricing theory, Egyptian Stock Exchange, principal component analysis