%0 Journal Article %A Galagedera, Don U.A. %A Faff, Robert %D 2017 %T Modelling the Risk and Return Relation Conditional on Market Volatility and Market Conditions %U https://bridges.monash.edu/articles/journal_contribution/Modelling_the_Risk_and_Return_Relation_Conditional_on_Market_Volatility_and_Market_Conditions/5566963 %R 10.4225/03/59fbb311eb3e3 %2 https://ndownloader.figshare.com/files/9667909 %K CAPM %K conditional market volatility %K modelling conditional betas %K 2004 %K 1959.1/2374 %K monash:2374 %X This paper investigates whether the risk-return relation varies, depending on changing market volatility and up/down market conditions. Three market regimes based on the level of conditional volatility of market returns are specified - 'low', 'neutral' and 'high'. The market model is extended to allow for these three market regimes and a three-beta asset-pricing model is developed. For a set of US industry sector indices using a cross-sectional regression, we find that the beta risk premium in the three market volatility regimes is priced. These significant results are uncovered only in the pricing model that accommodates up/down market conditions. %I Monash University