Abstract
This paper presents an empirical investigation of the relationship between risk premiums and conditional covariances in the Japanese stock markets. The conditional version of the capital asset pricing model (CAPM) is employed to formulate the movements of risk premiums. This model allows for time-varying conditional moments. The generalized method of moments (GMM) estimation technique developed by Hansen is applied to estimate and test the model's specification. Empirical results indicate that the model's specification should be rejected for Japanese data. The CAPM formulation does not provide a satisfactory approximation to the movements of time-varying risk premiums in Japan.
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