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We investigate time variation in Captial Asset Pricing Model (CAPM) betas for Book-to-Market (B/M) and momentum portfolios across stock market volatility regimes. For our analysis, we jointly model market and portfolio returns using a two-state Markov-switching process, with beta and the market risk premium allowed to vary between �low� and �high� volatility regimes. Our empirical findings suggest strong evidence of time variation in betas across volatility regimes in almost all the cases for which the unconditional CAPM can be rejected. Although the regime-switching conditional CAPM can still be rejected in many cases, the time-varying betas help explain portfolio returns much better than the unconditional CAPM, especially when market volatility is high.
