Time-Varying Conditional Covariances in Tests of Asset Pricing Models

36 Pages Posted: 8 Oct 2005

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Date Written: June 1989

Abstract

This paper proposes tests of asset pricing models that allow for time variation in conditional covariances. The evidence indicates that the conditional covariances do change through time. Estimates of the expected excess return on the market divided by the variance of the market (reward-to-risk ratio) are presented for the Sharpe-Lintner CAPM, as well as a number of tests of the model specification. The patterns of the pricing errors through time suggest the model's inability to capture the dynamic behavior of asset returns. This is the working paper version of my 1989 Journal of Financial Economics article.

Keywords: CAPM, asset pricing tests, market efficiency, time-varying risk, dynamic risk, predicting returns, forecasting stock returns

JEL Classification: G12, G11, G14

Suggested Citation

Harvey, Campbell R., Time-Varying Conditional Covariances in Tests of Asset Pricing Models (June 1989). Available at SSRN: https://ssrn.com/abstract=812925 or http://dx.doi.org/10.2139/ssrn.812925

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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