Does the CAPM Hold? A Time-Series Perspective
46 Pages Posted: 2 Apr 2019 Last revised: 4 Dec 2019
Date Written: November 27, 2019
If investors can hedge risk at no cost, then the CAPM should hold period by period Merton (1973). That is, the time-t expected return of an asset should be equal to the product of its time-t beta and the time-t market expected return. We empirically test this CAPM relation on a large set of equity portfolios. We show that regressing portfolio excess returns onto the product of their dynamic betas and market excess returns yields intercepts of zero and slopes of one. This provides evidence that the CAPM is highly relevant in explaining expected asset returns in the time series.
Keywords: Capital asset pricing model, cross-section of stock returns
JEL Classification: D53, G11, G12
Suggested Citation: Suggested Citation