Heteroskedasticity in Stock Returns
ABSTRACT 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…