Observable Implications of the Conditional CAPM

22 Pages Posted: 18 Mar 2020

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Date Written: February 22, 2020

Abstract

Tests of the conditional CAPM are often based on the joint (internally inconsistent) hypothesis that the stock portfolio used in the tests is the theoretical, mean-variance efficient, market portfolio. I derive a new test based exclusively on the theory in the conditional CAPM. According to this test, the conditional CAPM explains asset pricing anomalies, such as the unconditional alphas and betas of momentum, value, and size portfolios. In contrast, the unconditional CAPM theory is rejected by portfolios with negative unconditional betas and positive unconditional alphas, under the same assumptions. Hence, relaxing this joint assumption does not render the CAPM untestable.

Keywords: Conditional CAPM, anomalies, test, proxy, mean-variance frontier

JEL Classification: G11, G12, G14

Suggested Citation

de Oliveira Souza, Thiago, Observable Implications of the Conditional CAPM (February 22, 2020). Available at SSRN: https://ssrn.com/abstract=3542827 or http://dx.doi.org/10.2139/ssrn.3542827

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Danish Finance Institute ( email )

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