Heteroskedasticity in Stock Returns
G. William Schwert, Paul J. Seguin
NBER Working Paper No. 2956 (Also Reprint No. r1503)
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.
Document Object Identifier (DOI): 10.3386/w2956
Published: The Journal of Finance, Vol. XLV, No. 4, pp. 1129-1155, (September 1990).
Users who downloaded this paper also downloaded these: