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Testing the CAPM with Time‐Varying Risks and Returns
Author(s) -
BODURTHA JAMES N.,
MARK NELSON C.
Publication year - 1991
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.1540-6261.1991.tb04627.x
Subject(s) - capital asset pricing model , econometrics , heteroscedasticity , economics , risk premium , dividend , dividend yield , autoregressive model , beta (programming language) , excess return , systematic risk , residual , mathematics , financial economics , dividend policy , computer science , finance , paleontology , context (archaeology) , algorithm , biology , programming language
This paper draws on Engle's autoregressive conditionally heteroskedastic modeling strategy to formulate a conditional CAPM with time‐varying risk and expected returns. The model is estimated by generalized method of moments. A CAPM that allows mean excess returns to shift in January survives generalized method of moments specification tests for a number of omitted variables. However, a residual dividend yield component is found to remain in the excess returns of smaller firms. We find significant monthly and quarterly components in the risk premia and beta estimates.