Conditional beta: Evidence from Asian emerging markets

Pettengill, Sundaram, and Mathur (1995) respond to the prima facie failure of the standard CAPM and propose a conditional beta model by segmenting the market into two states - up markets (where the market excess return rm-rf is positive) and down markets (where rm-rf is negative). We examine this model in eleven Pacific Basin emerging markets using a range of variants: a model where betas are calculated using local excess returns, a model where betas are calculated using world excess returns, a model using both local and world excess returns and a model using both local and world excess returns where local returns are orthogonal to world returns. Only in the last of these formulations is there some evidence supporting the conditional beta model.