The conditional intertemporal asset pricing model (ICAPM) is studied using equity and government bond indexes as risk factors. The approach allows for the time-varying risk-premium, risk-adjusted returns, risk sensitivities, and residual variances. Betas, risk-adjusted returns, and residual variances are allowed to vary linearly with the conditioning information variables: a short-term interest rate level, a measure of interest rate volatility, a measure of interest rate term structure, a change in the FIM/USD exchange rate, a measure of currency market volatility, and a January indicator variable.

       Tests are done using weekly returns on seven size, industry and leverage ranked portfolios. The sample period is 1987 to 1995. Results reject the conditional efficiency of the combination of the stock and bond market indexes. However, the results show some evidence that the bond factor is relevant to the pricing of the stocks. Furthermore, the results show evidence that the conditioning variables can be used to model the time-varying betas.