Does the CAPM Hold? A Time-Series Perspective

46 Pages Posted: 2 Apr 2019 Last revised: 4 Dec 2019

See all articles by Michael Hasler

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Charles Martineau

University of Toronto - Rotman School of Management and UTSC Management

Date Written: November 27, 2019

Abstract

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

Hasler, Michael and Martineau, Charles, Does the CAPM Hold? A Time-Series Perspective (November 27, 2019). Available at SSRN: https://ssrn.com/abstract=3353903 or http://dx.doi.org/10.2139/ssrn.3353903

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

Charles Martineau (Contact Author)

University of Toronto - Rotman School of Management and UTSC Management ( email )

105 St-George
Toronto, Ontario M5S3E6
Canada

HOME PAGE: http://charlesmartineau.com

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