Abstract
This paper follows the approach of Wang [K. Wang, Asset pricing with conditioning information: A new test, Journal of Finance 58 (2003) 161–196] in order to test the conditional version of Sharpe–Lintner CAPM by adopting Local Maximum Likelihood nonparametric methods. This methodology does not only avoid the misspecification of betas, risk premiums and the stochastic discount factor but is also expected to perform better when compared with other more traditional methods such as the constant Nadaraya–Watson kernel estimator due to its superior performance at the sample extremes.
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