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INTERTEMPORAL ASSET PRICING WITHOUT CONSUMPTION DATA: EMPIRICAL TESTS
Author(s) -
Li Yuming
Publication year - 1997
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1997.tb00236.x
Subject(s) - econometrics , economics , stock (firearms) , covariance , capital asset pricing model , conditional variance , conditional expectation , volatility (finance) , autoregressive conditional heteroskedasticity , statistics , mathematics , mechanical engineering , engineering
In this paper I conduct tests of an intertemporal asset pricing model using variables that forecast stock returns as the risk factors. I document that the forecasting variables are priced so that expected excess returns are related to their conditional covariances with the forecasting variables. The variability in the covariance risk fails to explain the cross‐sectional and time‐series variation in expected stock returns. Evidence rejects restrictions on the prices of covariance risk imposed by the model with constant volatilities. I also find that an extended model that allows time‐varying conditional volatilities is misspecified.