Temporal Aggregation and the Continuous-Time Capital Asset Pricing Model.

The author examines how the empirical implications of the capital asset pricing model (CAPM) are affected by the length of the period over which returns are measured. He shows that the continuous-time CAPM becomes a multifactor model when the asset pricing relation is aggregated temporally. He uses L. P. Hansen's generalized method of moments approach to test the continuous-time CAPM at an unconditional level using size portfolio returns. The results indicate that the continuous-time CAPM cannot be rejected. In contrast, the discrete-time CAPM is easily rejected by the tests. These results have a number of important implications for the interpretations of tests of the CAPM that have appeared in the literature. Copyright 1989 by American Finance Association.