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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27883
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| Title: | A Cross-Sectional Investigation of the Conditional ICAPM |
| Authors: | Engle, Robert
Bali, Turan |
| Issue Date: | 9-Feb-2009 |
| Series/Report no.: | FIN-08-037 |
| Abstract: | This paper provides a cross-sectional investigation of the conditional
and unconditional intertemporal capital asset pricing model (ICAPM). The
results indicate that estimating the conditional ICAPM with a pooled
panel of time series and cross-sectional data in a multivariate
GARCH-in-mean framework is crucial in identifying the positive
risk-return tradeoff. Different from the traditional literature, the
paper decomposes the aggregate stock market portfolio into ten
book-to-market portfolios and then estimates a cross-sectionally
consistent slope coefficient on the conditional variance-covariance
matrix. The riskaversion coefficient, restricted to be the same across
all portfolios, is estimated to be positive and highly significant. This
is the first study testing the cross-sectional consistency of the
intertemporal relation by estimating the multivariate GARCH-in-mean
model with different slopes. The statistical results indicate the
equality of slope coefficients across all portfolios, supporting the
empirical validity and sufficiency of the conditional ICAPM. The paper
also provides evidence that the time-varying conditional covariances can
explain the value premium because the average risk-adjusted return
difference between the value and growth portfolios is economically and
statistically insignificant within the conditional ICAPM framework. |
| URI: | http://hdl.handle.net/2451/27883 |
| Appears in Collections: | Finance Working Papers
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