Does the CAPM Predict Returns?

40 Pages Posted: 22 Apr 2019

See all articles by Michael Hasler

Michael Hasler

University of Toronto - Rotman School of Management

Charles Martineau

University of Toronto - Rotman School of Management and UTSC Management

Date Written: April 8, 2019

Abstract

We provide strong empirical evidence that asset returns can be predicted using the dynamic CAPM. Indeed, the predictive power of the market return predictor transmits to the product of the asset's conditional beta and the market expected return. The dynamic CAPM yields a monthly out-of-sample R2 of about 4% across all test assets, which is of the same order of magnitude as the out-of-sample R2 obtained by predicting market returns using the market return predictor. Strategies exploiting the predictive power of the dynamic CAPM have Sharpe ratios up to 100% larger than those of the corresponding buy-and-hold strategies.

Keywords: capital asset pricing model, predictability, cross-section of stock returns

JEL Classification: D53, G11, G12

Suggested Citation

Hasler, Michael and Martineau, Charles, Does the CAPM Predict Returns? (April 8, 2019). Available at SSRN: https://ssrn.com/abstract=3368264

Michael Hasler

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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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