An Empirical Investigation of Arbitrage Pricing Theory: A case Zimbabwe

Publisher's version available on http://www.aabri.com/manuscripts/121167.pdf,This study investigates the Arbitrage Pricing Theory for the case of Zimbabwe using time series data from 1980 to 2005 within a vector autoregressive (VAR) framework. The Granger causality tests are conducted to establish the existence of causality among the variables like inflation, exchange rate and Gross Domestic Product. The VAR estimates as shown by the impulse response and variance decomposition together with the Granger causality test show that there is unidirectional causality from Consumer Price Index to Stock Prices. Although the Granger causality test has indicated that there is no causality between RGDP and Stock Prices, the variance decomposition has shown that the real GDP explains deviations in the Stock Prices in the long run. Granger causality tests found no meaningful relationships between Stock Prices and Exchange Rate but considering impulse response functions the effect is significant as early as the first period.,AABR