Observable Implications of the Conditional CAPM

Discussion Papers on Business and Economics, University of Southern Denmark, 13/2020

24 Pages Posted: 19 Jan 2021

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: November 10, 2020

Abstract

The derivation of observable implications of the conditional CAPM theory often includes the joint (internally inconsistent) hypothesis that the stock portfolio used in the tests is the theoretical, mean-variance efficient, market portfolio. The present paper generalizes this derivation by avoiding this joint hypothesis. The generalization reveals that the conditional CAPM plausibly explains asset pricing anomalies, such as the unconditional alphas and betas of momentum, value, and size portfolios, while the unconditional CAPM theory is still rejected by portfolios with negative unconditional betas and positive unconditional alphas. Hence, relaxing this joint assumption does not render the CAPM theory 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 (November 10, 2020). Discussion Papers on Business and Economics, University of Southern Denmark, 13/2020, Available at SSRN: https://ssrn.com/abstract=3727817 or http://dx.doi.org/10.2139/ssrn.3727817

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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