[A testable single-beta model of asset prices is presented. If state variables have a long-run stationary joint density function, then the rate return on a very long-term default-free discount bond will be perfectly correlated with the representative investor's marginal utility of consumption. Thus, the covariance of an asset's return with the return on such a bond will be an appropriate measure of the asset's riskiness. The model can be, therefore, applied or tested even though the market portfolio or aggregate consumption may not be observable. It also is shown that the expected rate of return on a very long-term bond is equal to its variance. This proposition can be tested to determine whether state variables follow stationary processes.]

A testable single-beta model of asset prices is presented. If state variables have a long-run stationary joint density function, then the rate return on a very long-term default-free discount bond will be perfectly correlated with the representative investor’s marginal utility of consumption. Thus, the covariance of an asset’s return with the return on such a bond will be an appropriate measure of the asset’s riskiness. The model can be, therefore, applied or tested even though the market portfolio or aggregate consumption may not be observable. It also is shown that the expected rate of return on a very long-term bond is equal to its variance. This proposition can be tested to determine whether state variables follow stationary processes.

[This article uses bond market data to empirically test the asset pricing model of Kazemi (1992). According to this model the rate of return on a long-term, pure-discount, default-free bond will be perfectly correlated with changes in the marginal utility of the representative investor. The covariability between financial asset returns and returns on such a bond can therefore serve as a measure of the riskiness of assets. The aim of this study is to determine whether the model can explain cross-sectional differences in the monthly returns of bonds with different maturity dates. We estimate and test the restrictions imposed by the model on returns of default-free bonds, while allowing the conditional distribution of bond returns to be time varying. The model is rejected during the full sample period (1973-1995) and the subperiod (1973-1980) when the Federal Reserve's focus is on interest rates, while the model is not rejected during the subperiod (1981-1995) when the Federal Reserve's focus is on money supply.]

Journal Article Time-Varying Risk and Return in the Bond Market: A Test of a New Equilibrium Pricing Model Get access Cynthia J. Campbell, Cynthia J. Campbell Iowa State University Address correspondence to Cynthia J. Campbell, Department of Finance, College of Business, Iowa State University, Ames, IA 50011, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar Hossein B. Kazemi, Hossein B. Kazemi University of Massachusetts, Amherst Search for other works by this author on: Oxford Academic Google Scholar Prasad Nanisetty Prasad Nanisetty Prudential Securities, New York Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 12, Issue 3, July 1999, Pages 631–642, https://doi.org/10.1093/revfin/12.3.0631 Published: 01 June 2015