CAPM Over the Long Run: 1926-2001

54 Pages Posted: 24 Jan 2006  

Joseph Chen

University of California, Davis - Graduate School of Management

Andrew Ang

BlackRock, Inc

Date Written: December 2005

Abstract

A conditional one-factor model can account for the spread in the average returns of portfolios sorted by book-to-market ratios over the long run from 1926-2001. In contrast, earlier studies document strong evidence of a book-to-market effect using OLS regressions in the post-1963 sample. However, the betas of portfolios sorted by book-to-market ratios vary over time and in the presence of time-varying factor loadings, OLS inference produces inconsistent estimates of conditional alphas and betas. We show that under a conditional CAPM with time-varying betas, predictable market risk premia, and stochastic systematic volatility, there is little evidence that the conditional alpha for a book-to-market trading strategy is statistically different from zero.

Suggested Citation

Chen, Joseph and Ang, Andrew, CAPM Over the Long Run: 1926-2001 (December 2005). NBER Working Paper No. w11903. Available at SSRN: https://ssrn.com/abstract=872739

Joseph S. Chen

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
(530) 752-7155 (Phone)
(530) 752-2924 (Fax)

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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