Tests of Asset Pricing with Time-Varying Expected Risk Premiums and Market Betas.

Tests of asset-pricing models are developed that allow expected risk premiums and market betas to vary over time. These tests exploit the relation between expected excess returns and current market values. Using weekly data for 1963-82 on ten common stock portfolios formed according to equity capitalization, a single risk-premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor. Conditional mean-variance efficiency of a value-weighted stock index is rejected, and the rejection is insensitive to how much variability of expected risk premiums is assumed. Copyright 1987 by American Finance Association.