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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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Paper provided by Massachusetts Institute of Technology (MIT), Sloan School of Management in its series Working papers with number 4427-03.

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Date of creation: 16 Sep 2003
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Handle: RePEc:mit:sloanp:3544

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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), SLOAN SCHOOL OF MANAGEMENT, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA

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Keywords: Time-varying betas; conditional CAPM; asset-pricing anomalies; book-to-market; momentum;

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