A best choice among asset pricing models? The conditional CAPM in Australia.

Abstract

We use Australian data to test the Conditional CAPM (Jagannathan and Wang, 1996). Our results are generally supportive: the model performs well compared with a number of competing asset pricing models. In contrast to Jagannathan and Wang’s study, however, we find that the inclusion of the market for human capital does not ‘save’ the concept of the time-independent market beta (it remains insignificant). We find support for the role of a “small-minus-big” factor (Fama and French, 1993) in pricing the cross-section of returns and find grounds to disagree with Jagannathan and Wang’s argument that this factor proxies for misspecified market risk.