  This paper is the first study to examine the time instability of the APT in
the Japanese stock market. In particular, we measure how changes in each risk
factor affect the stock risk premiums to investigate the validity of the APT
over time, applying the rolling window method to Fama and MacBeth's (1973)
two-step regression and Kamstra and Shi's (2023) generalized GRS test. We
summarize our empirical results as follows: (1) the changes in monetary policy
by major central banks greatly affect the validity of the APT in Japan, and (2)
the time-varying estimates of the risk premiums for each factor are also
unstable over time, and they are affected by the business cycle and economic
crises. Therefore, we conclude that the validity of the APT as an appropriate
model to explain the Japanese sector index is not stable over time.
