Andrew Ang

CAPM over the Long Run: 1926–2001

Coauthor(s): Joseph Chen.

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Abstract:

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.

Above is a preprint version of this article. The final version of this article may be found at http://dx.doi.org/10.1016/j.jempfin.2005.12.001

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