Article1991

Testing the CAPM with Time-Varying Risks and Returns

156 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Risk and Volatility Modeling

Abstract

ABSTRACT This paper draws on Engle's autoregressive conditionally heteroskedastic modeling strategy to formulate a conditional CAPM with time‐varying risk and expected returns. The model is estimated by generalized method of moments. A CAPM that allows mean excess returns to shift in January survives generalized method of moments specification tests for a number of omitted variables. However, a residual dividend yield component is found to remain in the excess returns of smaller firms. We find significant monthly and quarterly components in the risk premia and beta estimates.

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References

1986Generalized autoregressive conditional heteroskedasticity 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1973An Intertemporal Capital Asset Pricing Model 1981The relationship between return and market value of common stocks 1961Rational Expectations and the Theory of Price Movements 1987Expected stock returns and volatility 1988Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test 1988Dividend yields and expected stock returns

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1989Tests of international CAPM with time‐varying covariances 2006Conditional coskewness and asset pricing 2008The Poor Predictive Performance of Asset Pricing Models 1994Expected Returns, Time-Varying Risk, and Risk Premia 1990Are the Latent Variables in Time-Varying Expected Returns Compensation for Consumption Risk?1993General Tests of Latent Variable Models and Mean-Variance Spanning

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