In a framework where the CAPM holds conditionally, we develop a model for the cross-section with fairly general dividend dynamics and a stochastic discount factor that accounts for standard asset pricing moments. Our model, which successfully captures unconditional betas across industries, features a cyclical component that induces significant variations in conditional betas. These variations exhibit non-linear patterns in relation to the business cycle. Using the time-series of the betas implied by our model, we find that the conditional CAPM explains the cross section of industry average quarterly returns over the period from 1927-2021.
Paper : "Cyclical Beta"