TESTING THE CAPM WITH TIME-VARYING RISKS AND RETURNS

This paper draws on Engle's autoregressive conditionally heteroskedastic modeling strategy to formulate a conditional CAPM with time‐varying risk and expected returns. The model is estimated by generalized method of moments. A CAPM that allows mean excess returns to shift in January survives generalized method of moments specification tests for a number of omitted variables. However, a residual dividend yield component is found to remain in the excess returns of smaller firms. We find significant monthly and quarterly components in the risk premia and beta estimates. 1991 The American Finance Association