The Dynamic CAPM
42 Pages Posted: 2 Apr 2019 Last revised: 5 Jun 2019
Date Written: March 29, 2019
When investors can hedge risk at no cost, the dynamic risk premium of an asset is equal to its dynamic market beta times the dynamic risk premium of the market (Merton, 1973). We empirically test this dynamic CAPM relation on equity portfolios using both daily and monthly returns. We show that regressing an asset excess return onto the product of its dynamic beta and the market excess return yields intercepts of zero and a slope of one. This provides evidence that the dynamic CAPM cannot be rejected by the data, and therefore, that it can explain the cross-section of portfolio returns.
Keywords: Capital asset pricing model, cross-section of stock returns
JEL Classification: D53, G11, G12
Suggested Citation: Suggested Citation