Abstract
According to the capital asset pricing model (CAPM) developed originally by Sharpe (1964) and Lintner (1965), the required excess return on a risky asset is proportional to its non-diversifiable risk, for which a sufficient statistic is the covariance of the asset return with the return on the market portfolio. In the case where this covariance is zero, the risk is completely diversifiable and the required excess return over the safe rate of return is zero. Empirical tests of the CAPM have generally yielded results unfavourable to the model in its simplest form. In particular, variables other than the covariance of the return with the market return have been found to be significant in explaining the excess return—variables ranging from the own return variance to seasonal dummies (see Jensen (1972) or Schwert (1983) for surveys).
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Baba, Y., Engle, R. F., Kraft, D. F. and Kroner, K. F. (1987) Multivariate simultaneous generalized ARCH, University of California at San Diego mimeo.
Bollerslev, T. (1986) Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31, 307–28.
Bollerslev, T., Engle, R. F. and Wooldridge, J. M. (1988) A capital asset pricing model with time-varying covariances. Journal of Political Economy, 96, 116–31.
Breeden, D. T. (1979) An intertemporal asset pricing model with stochastic consumption and investment opportunities. Journal of Financial Economics, 7, 265–96.
Crowder, M. J. (1976) Maximum likelihood estimation for dependent observations. Journal of the Royal Statistical Society, Series B, 38, 45–53.
Dickens, R. (1987) The ARCH model as applied to the study of international asset market volatility, Bank of England Technical Paper No. 13.
Engle, R. F. (1982) Autoregressive conditional heteroskedasticity with estimates of the variance of UK inflation. Econometrica, 55, 987–1008.
Engle, R. F. (1987) Multivariate GARCH with factor structures—cointegration in variance, Paper presented at a Conference on Time-varying Variances in Money and Finance, University of California at San Diego, April 1987.
Engle, R. F., Lilien, D. and Robins, R. (1987) Estimating time varying risk premia in the term structure: the Arch-M model. Econometrica, 55, 391–407.
Fama, E. F. (1977) Foundations of Finance, Blackwell, Oxford.
French, K. R., Schwert, G. W. and Stambaugh, R. F. (1987) Expected stock returns and volatility. Journal of Financial Economics, 19, 3–29.
Hall, R. (1979) Stochastic implications of the life cycle-permanent income hypothesis: theory and evidence. Journal of Political Economy, 86 971–88.
Jensen, M. (1972) Capital markets: theory and evidence. Bell Journal of Economics and Management Science, 3, 77–102.
Klemkosky, R. and Martin, J. (1975) The adjustment of beta forecasts. Journal of Finance, 30 1123–8.
Lintner, J. (1965) The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics, 4, 13–37.
Markowitz, H. (1952) Portfolio selection. Journal of Finance, 7, 77–91.
Merton, R. (1980) On estimating the expected return of the market: an exploratory investigation. Journal of Financial Economics, 8, 323–61.
Roll, R. (1977) A critique of the asset pricing theory’s tests. Journal of Financial Economics, 4, 129–76.
Ross, S. (1976) The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13, 341–60.
Schweppe, F. (1965) Evaluation of likelihood functions for Gaussian signals, IEEE Transactions on Information Theory, 11, 61–70.
Schwert, G. W. (1983) Size and stocks returns, and other empirical regularities. Journal of Financial Economics, 12, 3–12.
Sharpe, W. (1964) Capital asset prices: a theory of market equilibrium under conditions of risk. Journal of Finance, 19, 425–42.
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 1990 Chapman and Hall Ltd
About this chapter
Cite this chapter
Hall, S.G., Miles, D.K., Taylor, M.P. (1990). A capital asset pricing model with time-varying betas: some results from the London Stock Exchange. In: Henry, S.G.B., Patterson, K.D. (eds) Economic Modelling at the Bank of England. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-0419-4_6
Download citation
DOI: https://doi.org/10.1007/978-94-009-0419-4_6
Publisher Name: Springer, Dordrecht
Print ISBN: 978-94-010-6674-7
Online ISBN: 978-94-009-0419-4
eBook Packages: Springer Book Archive