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Tests of Asset Pricing with Time-Varying Expected Risk Premiums and Market Betas

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Author Info
 Ferson, Wayne E
Kandel, Shmuel
Stambaugh, Robert F

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Abstract

Tests of asset-pricing models are developed that allow expected risk premiums and market betas to vary over time. These tests exploit the relation between expected excess returns and current market values. Using weekly data for 1963-82 on ten common stock portfolios formed according to equity capitalization, a single risk-premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor. Conditional mean-variance efficiency of a value-weighted stock index is rejected, and the rejection is insensitive to how much variability of expected risk premiums is assumed. Copyright 1987 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 42 (1987)
Issue (Month): 2 (June)
Pages: 201-20
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Handle: RePEc:bla:jfinan:v:42:y:1987:i:2:p:201-20

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  1. Shmuel Kandel & Robert McCulloch & Robert F. Stambaugh, 1993. "Bayesian Inference and Portfolio Efficiency," NBER Technical Working Papers 0134, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Franzoni, Francesco & Adrian, Tobias, 2005. "Learning about Beta: time-varying factor loadings, expected returns and the conditional CAPM," Les Cahiers de Recherche 828, Groupe HEC. [Downloadable!]
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  3. Locarno, Alberto & Massa, Massimo, 2005. "Monetary Policy Uncertainty and the Stock Market," CEPR Discussion Papers 4828, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. J. Andrew Coutts, Terence C. Mills, Jennifer Roberts, 1997. "Time series and cross-section parameter stability in the market model: the implications for event studies," European Journal of Finance, Taylor and Francis Journals, vol. 3(3), pages 243-259, September. [Downloadable!] (restricted)
  5. Andrew W. Lo & A. Craig MacKinlay, 1995. "Maximizing Predictability in the Stock and Bond Markets," NBER Working Papers 5027, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Monica Billio & Mila Getmansky & Loriana Pelizzon, 2006. "Phase-Locking and Switching Volatility in Hedge Funds," Working Papers 2006_54, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
  7. Martin Lettau & Sydney Ludvigson, 1999. "Resurrecting the (C)CAPM: a cross-sectional test when risk premia are time-varying," Staff Reports 93, Federal Reserve Bank of New York. [Downloadable!]
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  8. Alberto Giovannini & Philippe Jorion, 1989. "The Time-Variation of Risk and Return in the Foreign Exchange and Stock Markets," NBER Working Papers 2573, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Andrew W. Lo & Jiang Wang, 1994. "Implementing Option Pricing Models When Asset Returns Are Predictable," NBER Working Papers 4720, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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