Department of Economics2024-11-0920091479-840910.1093/jjfinec/nbp0062-s2.0-67650132841http://dx.doi.org/10.1093/jjfinec/nbp006https://hdl.handle.net/20.500.14288/14506This paper uses a multivariate GaRCH model to account for time variation in factor loadings and idiosyncratic risk in improving the performance of the CaPM and the three-factor Fama-French model. I show how to incorporate time variation in betas and the second moments of the residuals in a very general way. Both the static and conditional CaPM substantially outperform the three-factor model in pricing industry portfolios. Using a dynamic CaPM model results in a 30% reduction in the average absolute pricing error of size/book-to-market portfolios. ad hoc analysis shows that the market beta of a value-minus-growth portfolio decreases whenever the default premium increases as well as during economic recessions.BusinessFinanceEconomicsJournal Article267441400003Q23111