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CAPM over the long run: 1926-2001

  • Ang, Andrew
  • Chen, Joseph

A conditional one-factor model can account for the spread in the average returns of portfolios sorted by book-to-market ratios over the long run from 1926-2001. In contrast, earlier studies document strong evidence of a book-to-market effect using OLS regressions in the post-1963 sample. However, the betas of portfolios sorted by book-to-market ratios vary over time and in the presence of time-varying factor loadings, OLS inference produces inconsistent estimates of conditional alphas and betas. We show that under a conditional CAPM with time-varying betas, predictable market risk premia, and stochastic systematic volatility, there is little evidence that the conditional alpha for a book-to-market trading strategy is statistically different from zero.

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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 14 (2007)
Issue (Month): 1 (January)
Pages: 1-40

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Handle: RePEc:eee:empfin:v:14:y:2007:i:1:p:1-40
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