Premium
Tests of Asset Pricing with Time‐Varying Expected Risk Premiums and Market Betas
Author(s) -
FERSON WAYNE E.,
KANDEL SHMUEL,
STAMBAUGH ROBERT F.
Publication year - 1987
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1987.tb02564.x
Subject(s) - capital asset pricing model , econometrics , risk premium , economics , value premium , capitalization , equity premium puzzle , security market line , financial economics , market capitalization , stock market , stock market index , market risk , expected shortfall , equity (law) , stock (firearms) , systematic risk , market portfolio , portfolio , paleontology , linguistics , philosophy , horse , biology , mechanical engineering , political science , law , engineering
Tests of asset‐pricing models are developed that allow expected risk premiums and market betas to vary over time. These tests exploit the relation between expected excess returns and current market values. Using weekly data for 1963 through 1982 on ten common stock portfolios formed according to equity capitalization, a single‐risk‐premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor. Conditional mean‐variance efficiency of a value‐weighted stock index is rejected, and the rejection is insensitive to how much variability of expected risk premiums is assumed.