Testing the CAPM with Time-Varying Risks and Returns

This paper draws on Robert F. Engle's autoregressive conditionally heteroskedastic modeling strategy to formulate a conditional capital asset pricing model with time-varying risk and expected returns. The model is estimated by generalized method of moments. A capital asset pricing model 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. The authors find significant monthly and quarterly components in the risk premia and beta estimates. Copyright 1991 by American Finance Association.

[1]  Lilian Ng.  Tests of the CAPM with Time-Varying Covariances: A Multivariate GARCH Approach , 1991 .

[2]  E. Fama.  Stock Returns, Expected Returns, and Real Activity , 1990 .

[3]  Jay Shanken,et al.  Intertemporal asset pricing: An Empirical Investigation , 1990 .

[4]  Campbell R. Harvey.  Time-Varying Conditional Covariances in Tests of Asset Pricing Models , 1989 .

[5]  G. Schwert.  Why Does Stock Market Volatility Change Over Time? , 1988 .

[6]  Nelson C. Mark.  Time-varying betas and risk premia in the pricing of forward foreign exchange contracts , 1988 .

[7]  E. Fama,et al.  Dividend yields and expected stock returns , 1988 .

[8]  Philippe Jorion,et al.  The Time-Variation of Risk and Return in the Foreign Exchange and Stock Markets , 1988 .

[9]  E. Fama,et al.  Permanent and Temporary Components of Stock Prices , 1988, Journal of Political Economy.

[10]  J. Wooldridge,et al.  A Capital Asset Pricing Model with Time-Varying Covariances , 1988, Journal of Political Economy.

[11]  K. French,et al.  Expected stock returns and volatility , 1987 .

[12]  T. Bollerslev,et al.  A CONDITIONALLY HETEROSKEDASTIC TIME SERIES MODEL FOR SPECULATIVE PRICES AND RATES OF RETURN , 1987 .

[13]  C. Engel,et al.  Tests of International CAPM with Time-Varying Covariances , 1987 .

[14]  R. Stambaugh,et al.  Tests of Asset Pricing with Time‐Varying Expected Risk Premiums and Market Betas , 1987 .

[15]  Lars Peter Hansen,et al.  THE ROLE OF CONDITIONING INFORMATION IN DEDUCING TESTABLE RESTRICTIONS IMPLIED BY DYNAMIC ASSET PRICING MODELS1 , 1987 .

[16]  Russell P. Robins,et al.  Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model , 1987 .

[17]  A. Lo,et al.  Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test , 1987 .

[18]  Donald B. Keim,et al.  Predicting returns in the stock and bond markets , 1986 .

[19]  George Tauchen,et al.  Statistical Properties of Generalized Method-of-Moments Estimators of Structural Parameters Obtained From Financial Market Data , 1986 .

[20]  T. Bollerslev,et al.  Generalized autoregressive conditional heteroskedasticity , 1986 .

[21]  A note on linear heteroscedasticity models , 1986 .

[22]  W. Newey,et al.  Generalized method of moments specification testing , 1985 .

[23]  J. Frankel.  Portfolio shares as ‘Beta Breakers’ , 1985 .

[24]  J. Campbell.  Stock Returns and the Term Structure , 1985 .

[25]  W. Ferson,et al.  Testing asset pricing models with changing expectations and an unobservable market portfolio , 1985 .

[26]  J. Frankel.  Portfolio Crowding-Out, Empirically Estimated , 1985 .

[27]  W. Dickens,et al.  Are Asset Demand Functions Determined by CAPM? , 1983 .

[28]  A. Christie,et al.  The stochastic behavior of common stock variances: value , 1982 .

[29]  L. Hansen,et al.  Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models , 1982 .

[30]  L. Hansen.  Large Sample Properties of Generalized Method of Moments Estimators , 1982 .

[31]  R. Engle.  Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation , 1982 .

[32]  J. MacKinnon,et al.  Several Tests for Model Specication in the Pres-ence of Alternative Hypotheses , 1981 .

[33]  R. Banz,et al.  The relationship between return and market value of common stocks , 1981 .

[34]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[35]  R. C. Merton,et al.  On Estimating the Expected Return on the Market: An Exploratory Investigation , 1980 .

[36]  Douglas T. Breeden.  An Intertemporal Asset Pricing Model with Stochastic Consumption and Investment Opportunities , 1979 .

[37]  G. William Schwert,et al.  Asset returns and inflation , 1977 .

[38]  Richard Roll,et al.  A Critique of the Asset Pricing Theory''s Tests: Part I , 1977 .

[39]  Mark Rubinstein,et al.  The Valuation of Uncertain Income Streams and the Pricing of Options , 1976 .

[40]  John B. Long,et al.  Stock prices, inflation, and the term structure of interest rates , 1974 .

[41]  E. Fama,et al.  Tests of the multiperiod two-parameter model , 1974 .

[42]  R. C. Merton,et al.  AN INTERTEMPORAL CAPITAL ASSET PRICING MODEL , 1973 .

[43]  Irwin Friend,et al.  A NEW LOOK AT THE CAPITAL ASSET PRICING MODEL , 1973 .

[44]  J. Muth.  Rational Expectations and the Theory of Price Movements , 1961 .

[45]  R. Muth.  Economic Change and Rural-Urban Land Conversions , 1961 .