The CAPM Holds
40 Pages Posted: 2 Apr 2019 Last revised: 4 Apr 2019
Date Written: March 29, 2019
When investors' hedging demands are equal to zero, the conditional risk premium of an asset is equal to its conditional market beta times the conditional risk premium of the market (Merton, 1973). We empirically test this dynamic CAPM relation on portfolios and individual stocks using both daily and monthly returns. We show that regressing an asset excess return onto the product of its conditional beta and the market excess return yields an intercept of zero, a slope of one, and an R2 of about 80%. That is, the data lend support to the null hypothesis that the dynamic CAPM holds.
Keywords: Capital asset pricing model, cross-section of stock returns
JEL Classification: D53, G11, G12
Suggested Citation: Suggested Citation