Explaining the Failure of the Unconditional CAPM with the Conditional CAPM

Michael Hasler () and Charles Martineau ()
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Michael Hasler: Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080
Charles Martineau: Rotman School of Management and UTSC Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada

Management Science, 2023, vol. 69, issue 3, 1835-1855

Abstract: When the cost of hedging is nil, the conditional capital asset pricing model (CAPM) holds. We empirically test the conditional CAPM by regressing asset returns onto the product of their conditional betas and market returns. Estimated intercepts are not statistically different from zero, implying that the conditional CAPM successfully explains the conditional level of asset returns. Yet, unconditional betas do not explain the cross section of average asset returns; the unconditional CAPM fails. We show why and how the success of the conditional CAPM actually explains the failure of the unconditional CAPM, thereby rationalizing the coexistence of these two intriguing results.

Keywords: capital asset pricing model; asset pricing tests (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:3:p:1835-1855

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