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Heteroskedasticity In Stock Returns

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  • SCHWERT, G.W.
  • SEGUIN, P.J.

Abstract

The authors use predictions of aggregate stock return variances from daily data to estimate time-varying monthly variances for size-ranked portfolios. The authors 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 are then documented. Accounting for heteroskedasticity increases the evidence that risk-adjusted returns are related to firm size. The authors also estimate a constant correlation model. Portfolio volatilities predicted by this model are similar to those predicated by more complex multivariate generalized autoregressive conditional heteroskedasticity procedures. Copyright 1990 by American Finance Association.
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Suggested Citation

  • Schwert, G.W. & Seguin, P.J., 1988. "Heteroskedasticity In Stock Returns," Papers bc_88-02, Rochester, Business - General.
    • Handle: RePEc:fth:robuge:bc_88-02
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