The Conditional CAPM Does Not Explain Asset-pricing Anomalies
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4427-03.pdf
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Author(s)
LEWELLEN, JONATHAN
NAGEL, STEFAN
Date Issued
September 16, 2003
Series/Report no.
MIT Sloan School of Management Working Paper;4427-03
Abstract
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. We argue, 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. We test this conjecture empirically by directly estimating conditional alphas and betas from short-window regressions (avoiding the need to specify conditioning information). The tests show, consistent with our analytical results, that the conditional CAPM performs nearly as poorly as the unconditional CAP
Subjects
Time-varying betas
conditional CAPM
asset-pricing anomalies
book-to-market
momentum
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