Testing the CAPM with Time‐Varying Risks and Returns

  • Author(s): JAMES N. BODURTHA, NELSON C. MARK
  • Published: Apr 30, 2012
  • Pages: 1485-1505
  • DOI: 10.1111/j.1540-6261.1991.tb04627.x

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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