Identifying risk factors within the arbitrage pricing theory in the egyptian stock market

Abstract EN

The multivariate technique of the principal component analysis is used to identify the major risk factors within the arbitrage pricing theory in the Egyptian stock market.

Three principal components are identified.

The first is a representative of the total performance of the market.

It is heavily loaded with telecommunications, media and construction.

The second represents housing and development.

The third represents consumer staples, specially the mills.

The results make economic sense since Egypt has witnessed a massive growth in the telecommunications sector, especially mobile phones.

Also, the construction and housing sectors are very active due to the rapid growth in population and growing needs for infrastructure and housing projects.

The mills are very important given that bread and bakeries are among the most important food items in Egypt.

The three components explain 90% of the variation in the returns on the general market index.

The three components can be used to measure the risk premium, and hence the required rate of return for individual stocks in Egypt.

The measurement of the risk premium and the required rate of return are left for future research.