Does the CAPM Predict Returns?

46 Pages Posted: 22 Apr 2019 Last revised: 15 Jun 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: June 13, 2019

Abstract

We provide strong empirical evidence that asset excess returns can be predicted using the dynamic CAPM. When predicting next month excess returns, the dynamic CAPM yields an out-of-sample R2 of about 4% across all portfolios and of about 2.7% across all S&P 500 stocks. That is, the predictive power of the market return predictor transmits to the product of the asset's dynamic beta and the dynamic risk premium of the market. As a consequence, 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? (June 13, 2019). Available at SSRN: https://ssrn.com/abstract=3368264 or http://dx.doi.org/10.2139/ssrn.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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