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Temporal Aggregation and the Continuous-Time Capital Asset Pricing Model



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    • Academic Faculty of Finance, The Ohio State University. I am grateful for the comments and suggestions received from Warren Bailey, Stephen Buser, K. C. Chan, George Constantinides, Wayne Ferson, Campbell Harvey, Shmuel Kandel, Hersh Shefrin, Robert Stambaugh, René Stulz, Finance workshop participants at The Ohio State University, and participants at the 1988 Western Finance Association Meetings. I am particularly grateful for the referee's insights and suggestions. All errors are my responsibility.


We examine how the empirical implications of the Capital Asset Pricing Model (CAPM) are affected by the length of the period over which returns are measured. We show that the continuous-time CAPM becomes a multifactor model when the asset pricing relation is aggregated temporally. We use Hansen's Generalized Method of Moments (GMM) approach to test the continuous-time CAPM at an unconditional level using size portfolio returns. The results indicate that the continuous-time CAPM cannot be rejected. In contrast, the discrete-time CAPM is easily rejected by the tests. These results have a number of important implications for the interpretation of tests of the CAPM which have appeared in the literature.

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