The Conditional CAPM Does Not Explain Asset-Pricing Anomalies

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Abstract
Recent studies suggest that the conditional CAPM might hold, period-by-period, and that time-varying betas can explain the failures of the simple, unconditional CAPM. We argue, however, that variation in betas and expected returns would have to be implausibly large to explain important asset-pricing anomalies, like book-to-market and momentum. We test this conjecture by directly estimating conditional alphas and betas from short-window regressions, avoiding the need to specify conditioning information. The tests show, consistent with our analytical results, that the conditional CAPM performs nearly as poorly as the unconditional CAPM.

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