Abstract
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 permits the factor risk-premia, asset betas, and residual variances to vary with the levels of observable state variables. Both the level and volatility of one-month T-bill rates are found to be associated with economically important shifts in the investment characteristics of size and industry portfolios and stock and bond indexes. January seasonals in equity variance and small-firm interest rate risk are also observed.
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