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The Conditional CAPM does not Explain Asset-Pricing Anamolies

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Jonathan Lewellen
Stefan Nagel

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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 CAPM.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9974.

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Date of creation: Sep 2003
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Handle: RePEc:nbr:nberwo:9974

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G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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