We derive and test an alternative closed-form general equilibrium model of the term structure within the Cox, Ingersoll, and Ross theoretical framework in which yields are nonlinear functions of the risk-free rate. We show that equilibrium bond prices and the risk-free rate are not always inversely related and that bond risk need not be strictly increasing in maturity. Using Hansen's generalized method of moments to obtain parameter estimates, this nonlinear model outperforms the Cox, Ingersoll, and Ross square root model in describing actual Treasury bill yields for the 1964–1986 period.

We examine how the empirical implications of the Capital Asset Pricing Model (CAPM) are affected by the length of the period over which returns are measured. We show that the continuous‐time CAPM becomes a multifactor model when the asset pricing relation is aggregated temporally. We use Hansen's Generalized Method of Moments (GMM) 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 interpretation of tests of the CAPM which have appeared in the literature.