NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Heteroskedasticity in Stock Returns

G. William Schwert, Paul J. Seguin

NBER Working Paper No. 2956 (Also Reprint No. r1503)
Issued in February 1991
NBER Program(s):   ME

We use predictions of aggregate stock return variances from daily data to estimate time varying monthly variances for size-ranked portfolios. We propose and estimate a single factor model of heteroskedasticity for portfolio returns. This model implies time-varying betas. Implications of heteroskedasticity and time-varying betas for tests of the capital asset pricing model (CAPM) are then documented. Accounting for heteroskedasticity increases the evidence that risk-adjusted returns are related to firm size. We also estimate a constant correlation model. Portfolio volatilities predicted by this model are similar to those predicted by more complex multivariate generalized-autoregressive- conditional- heteroskedasticity (GARCH) procedures.

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Document Object Identifier (DOI): 10.3386/w2956

Published: The Journal of Finance, Vol. XLV, No. 4, pp. 1129-1155, (September 1990).

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