Journal Article

A rational pricing explanation for the failure of CAPM

Abstract: Many authors have found that the capital asset pricing model (CAPM) does not explain stock returns?possibly because it is only a special case of Merton?s (1973) intertemporal CAPM under the assumption of constant investment opportunities (e.g., a constant expected equity premium). This paper explains the progress that has been made by dropping the assumption that expected returns are constant. First, the evidence on the predictability of returns is summarized; then, an example from Campbell (1993) is used to show how time-varying expected returns can lead to the rejection of the CAPM.

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Review

Publication Date: 2004

Volume: 86

Issue: May

Pages: 23-34