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The conditional CAPM does not explain asset-pricing anomalies

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  • Lewellen, Jonathan
  • Nagel, Stefan

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

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 82 (2006)
Issue (Month): 2 (November)
Pages: 289-314

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Handle: RePEc:eee:jfinec:v:82:y:2006:i:2:p:289-314

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Web page: http://www.elsevier.com/locate/inca/505576

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