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Observable implications of the conditional CAPM

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The derivation of observable implications of the conditional CAPM theory often includes the joint (internally inconsistent) hypothesis that the stock portfolio used in the tests is the theoretical, mean-variance efficient, market portfolio. The present paper generalizes this derivation by avoiding this joint hypothesis. The generalization reveals that the conditional CAPM plausibly explains asset pricing anomalies, such as the unconditional alphas and betas of momentum, value, and size portfolios, while the unconditional CAPM theory is still rejected by portfolios with negative unconditional betas and positive unconditional alphas. Hence, relaxing this joint assumption does not render the CAPM theory untestable.

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  • de Oliveira Souza, Thiago, 2020. "Observable implications of the conditional CAPM," Discussion Papers on Economics 13/2020, University of Southern Denmark, Department of Economics.
    • Handle: RePEc:hhs:sdueko:2020_013
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    More about this item

    Keywords

    Conditional CAPM; anomalies; test; proxy; mean-variance frontier;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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