REVISITING ARBITRAGE PRICING THEORY (APT) IN EMERGING MARKETS: EVIDENCE FROM THE INDONESIA STOCK EXCHANGE

The Arbitrage Pricing Model (APT), initially proposed as an alternative to the Capital Asset Pricing Model (CAPM), plays a pivotal role in understanding investment decisions and asset pricing. This study investigates the practical applicability of APT within the dynamic context of emerging markets, with a specific focus on the Indonesia Stock Exchange (IDX). While APT offers a comprehensive framework for assessing asset pricing, its complexity and real-world implementation have raised significant challenges. This research explores the relationship between macroeconomic factors and stock returns in Indonesia, aiming to simplify the understanding of APT and its relevance in emerging economies. The analysis employs a Vector Error Correction Model (VECM) and Granger causality tests to unveil the intricate dynamics between the Indonesian stock market and key macroeconomic variables, including industrial production, interest rates, exchange rates, inflation, and GDP. The findings indicate a long-term relationship between the IDX and selected macroeconomic factors, reaffirming APT's theoretical underpinnings. However, the positive Error Correction Term (ECT) coefficient suggests that stock returns in the Indonesian market may not readily revert to equilibrium as assumed by APT. This challenges the model's applicability in this specific context, highlighting the need for further research to adapt and refine APT for emerging markets.