Examination of Conditional Asset Pricing in UK Stock Returns

Jonathan Fletcher

The Financial Review, 2002, vol. 37, issue 3, 447-468

Abstract: I examine the empirical performance of various specifications of the capital asset pricing model (CAPM) in UK stock returns, using the stochastic discount framework. When the proxy for the market portfolio includes a proxy for labor income growth in addition to the stock market index, the performance of the CAPM improves. The improvement in performance shows in the magnitude and significance of the pricing errors and in the reduced impact of asset characteristics and other factors in the pricing of assets. There is further improvement when I use conditional versions of the models.

Date: 2002
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