Intertemporal Asset Pricing

The conditional efficiency of an unspecified portfolio of a value-weighted stock index and a long-term government bond index is rejected in a framework that allows the factor risk-premia, asset betas, and residual variances to vary with the levels of observable state variables. Plots of the monthly series TB (Treasury bill rate) and TBV (measure of rate volatility), along with the residuals from a regression of TBV and TB, are shown for the 30-year period from 1953 to 1982. Over this period, expected stock return is negatively related to TB and positively related to TBV. These relations are observed for every size category and industry grouping, as well as the CRSP value-weighted market index. Sensitivity to TB varies across industries, with the coefficient for capital goods almost twice that of petroleum. However, there is little variation associated with firm size. Variance of return is directly related to TB for every portfolio examined.