Realized Beta and the Conditional CAPM: A Time-Series Test When Risk Premia Are Time-Varying

Anisha Ghosh* (University of London)

Abstract

This paper provides a nonparametric test of the conditional CAPM focusing on a nonparametric measure of the stocks' market beta called realized beta that is easily computed from high frequency intra-period returns. This approach to testing the conditional CAPM efficiently exploits the information in high frequency intra-period returns. Second, this approach does not require the econometrician to know the 'right' state variables, i.e., it does not require any conditioning information. Third, the approach allows us to explicitly incorporate the measurement error in the estimated betas in the inference problem using the distributional results in Barndorff-Nielsen and Shephard (2004).