The Conditional CAPM Does Not Explain Asset-Pricing Anamolies
- Topics:
- Investment and Capital Markets
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Overview: Recent studies suggest that the conditional CAPM might hold, period-by-period, and that time-varying betas can explain the failures of the simple, unconditional CAPM. The paper argues, however, that significant departures from the unconditional CAPM would require implausibly large time-variation in betas and expected returns. Thus, the conditional CAPM is unlikely to explain asset-pricing anomalies like book-to-market and momentum. It tests this conjecture empirically by directly estimating conditional alphas and betas from short-window regressions (avoiding the need to specify conditioning information). The test shows, consistent with our analytical results that the conditional CAPM performs nearly as poorly as the unconditional CAPM.
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Format: PDF | Size: 409KB | Date: Sep 2003 | Pages: 41
