Heteroskedasticity in Stock Returns
G. William Schwert
University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
Paul J. Seguin
Analytic Focus LLC
Journal of Finance, 45 (September 1990) 1129-1155
We use predictions of aggregate stock return variances to estimate time-varying
monthly variances for size-ranked portfolios. We propose and test 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. Further, a constant correlation model is proposed and
tested. Disaggregate volatilities predicted by this model are similar to those
predicted by more complex multivariate generalized-autoregressive-conditional-heteroskedasticity
Key words: Heteroskedasticity, Generalized least squares, Beta, Capital
asset pricing model, Stock returns, Size effect
JEL Classifications: G12, G31
Cited 135 times in the SSCI and SCOPUS through 2014
© Copyright 1990, American Finance Association
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