Incremental significance of pre-specified macroeconomic factors in testing the arbitrage pricing theory: Empirical evidence with Finnish data

The applications of the arbitrage pricing theory (APT) have received a lot of attention in recent financial economics literature. When testing the APT, common factors generating stock returns have been produced either by applying exploratory factor analysis on stock returns or by using pre-specified macroeconomic variables. The incremental significance of these factors has, however, received only limited attention so far. The pre-specified macroeconomic factors are shown to have incremental information content with respect to the factors produced by exploratory factor analysis on stock returns in the Finnish stock market.