The Time Series of CAPM-Implied Returns

43 Pages Posted: 2 Apr 2019 Last revised: 16 Apr 2020

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: April 15, 2020

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 equity portfolios. We show that regressing portfolio excess returns onto the product of their dynamic betas and market excess returns yields intercepts that are economically small and statistically not different from zero. This provides evidence that the CAPM is highly relevant in explaining the conditional level of 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, The Time Series of CAPM-Implied Returns (April 15, 2020). 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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