Tests of the Relations Among Marketwide Factors, Firm‐Specific Variables, and Stock Returns Using a Conditional Asset Pricing Model

  • Author(s): JIA HE, RAYMOND KAN, LILIAN NG, CHU ZHANG
  • Published: Apr 30, 2012
  • Pages: 1891-1908
  • DOI: 10.1111/j.1540-6261.1996.tb05230.x

ABSTRACT

In this article we generalize Harvey's (1989) empirical specification of conditional asset pricing models to allow for both time‐varying covariances between stock returns and marketwide factors and time‐varying reward‐to‐covariabilities. The model is then applied to examine the effects of firm size and book‐to‐market equity ratios. We find that the traditional asset pricing model with commonly used factors can only explain a small portion of the stock returns predicted by firm size and book‐to‐market equity ratios. The results indicate that allowing time‐varying covariances and time‐varying reward‐to‐covariabilities does little to salvage the traditional asset pricing models.

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