This study examines the application of the arbitrage pricing theory (APT) in the Bombay stock market and attempts to identify the macroeconomic variables which influence the sensex. The sample consists of the monthly values of BSE sensex and the macroeconomic variables, namely, gold prices, interest rate, oil prices, exchange rate and money supply (M3). The period covered for the study is from April 2001 to July 2014. The unit root tests showed that the variables were stationary at the level itself. Due to high correlation between gold and oil prices, OLS regression was applied after excluding oil prices and the results indicated that except for interest rate, the other three variables have significant influence on the sensex. The most significant variable to influence is gold followed by exchange rate which has a negative influence on the sensex. Results of Granger causality test indicated that there was no causality between any of the macroeconomic variables and the sensex.
APT Theory, Sensex Returns, Gold Prices, Exchange Rates, Money Supply, Multicollinearity
