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A Cross-Sectional Empirical Test of a Dual-State Multi-factor Pricing Model

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  • Howton, Shelly W
  • Peterson, David R

Abstract

During empirical testing of the Capital Asset Pricing Model an assumption is typically made that risk is intertemporally constant. However, prior research finds that risk changes over time. We empirically test a conditional dual-state cross-sectional model allowing risk to change through prior identification of different market and economic states. We examine relationships between returns and conditional market and economic-factor betas, size, book-to-market equity, and earnings-price ratios. We find that relationships shift across regimes, suggesting the importance of a conditional, as opposed to unconditional, model. Relationships also change in January. Copyright 1999 by MIT Press.

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  • Howton, Shelly W & Peterson, David R, 1999. "A Cross-Sectional Empirical Test of a Dual-State Multi-factor Pricing Model," The Financial Review, Eastern Finance Association, vol. 34(3), pages 47-63, August.
    • Handle: RePEc:bla:finrev:v:34:y:1999:i:3:p:47-63
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    Cited by:

    1. Baetje, Fabian & Menkhoff, Lukas, 2013. "Macro determinants of U.S. stock market risk premia in bull and bear markets," Hannover Economic Papers (HEP) dp-520, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.

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