CAPM Over the Long Run: 1926-2001
NBER Working Paper No. 11903
A conditional one-factor model can account for the spread in the average returns of portfolios sorted by book-to-market ratios over the long run from 1926-2001. In contrast, earlier studies document strong evidence of a book-to-market effect using OLS regressions in the post-1963 sample. However, the betas of portfolios sorted by book-to-market ratios vary over time and in the presence of time-varying factor loadings, OLS inference produces inconsistent estimates of conditional alphas and betas. We show that under a conditional CAPM with time-varying betas, predictable market risk premia, and stochastic systematic volatility, there is little evidence that the conditional alpha for a book-to-market trading strategy is statistically different from zero.
Document Object Identifier (DOI): 10.3386/w11903
Published: Ang, Andrew and Joe Chen. "CAPM Over the Long Run: 1926-2001." Journal of Empirical Finance 14, 1 (2007): 1-40.
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