Time-Varying Conditional Covariances in Tests of Asset Pricing Models
Author: Campbell R. Harvey
Publisher:
Published: 2005
Total Pages: 36
ISBN-13:
DOWNLOAD EBOOKThis paper proposes tests of asset pricing models that allow for time variation in conditional covariances. The evidence indicates that the conditional covariances do change through time. Estimates of the expected excess return on the market divided by the variance of the market (reward-to-risk ratio) are presented for the Sharpe-Lintner CAPM, as well as a number of tests of the model specification. The patterns of the pricing errors through time suggest the model's inability to capture the dynamic behavior of asset returns. This is the working paper version of my 1989 Journal of Financial Economics article.