Time-Varying Conditional Covariances in Tests of Asset Pricing Models
36 Pages Posted: 8 Oct 2005
Date Written: June 1989
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: Suggested Citation