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The Conditional CAPM does not Explain Asset-Pricing Anamolies

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  • Jonathan Lewellen
  • Stefan Nagel

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.

Suggested Citation

  • Jonathan Lewellen & Stefan Nagel, 2003. "The Conditional CAPM does not Explain Asset-Pricing Anamolies," NBER Working Papers 9974, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9974
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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