All authors from Graduate School of Business, University of Chicago. We are grateful to John Abowd, Nai-Fu Chen, George Constantinides, Kenneth Dunn, Eugene Fama, Michael Gibbons, Gur Huberman, Ravi Jagannathan, and participants in seminars at the American Finance Association meetings, Ohio State University, Southern Methodist University, the Wharton School, the Western Finance Association meetings, and Yale University for helpful discussions and comments. We thank Richard Rogalski for providing the Treasury bill data for 1963 through 1981 and Vikram Nanda for collecting additional data to extend the series through 1982.
Tests of Asset Pricing with Time-Varying Expected Risk Premiums and Market Betas
Article first published online: 30 APR 2012
1987 The American Finance Association
The Journal of Finance
Volume 42, Issue 2, pages 201–220, June 1987
How to Cite
FERSON, W. E., KANDEL, S. and STAMBAUGH, R. F. (1987), Tests of Asset Pricing with Time-Varying Expected Risk Premiums and Market Betas. The Journal of Finance, 42: 201–220. doi: 10.1111/j.1540-6261.1987.tb02564.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Tests of asset-pricing models are developed that allow expected risk premiums and market betas to vary over time. These tests exploit the relation between expected excess returns and current market values. Using weekly data for 1963 through 1982 on ten common stock portfolios formed according to equity capitalization, a single-risk-premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor. Conditional mean-variance efficiency of a value-weighted stock index is rejected, and the rejection is insensitive to how much variability of expected risk premiums is assumed.