Size,time-varying beta,and conditional heteroscedasticity in UK stock returns |
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| Authors: | Mario G. Reyes |
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| Affiliation: | 1. Instituto Nacional de Tecnología Agropecuaria (INTA), Estación Experimental Agropecuaria Balcarce, CC 276, 7620 Balcarce, Buenos Aires, Argentina;2. Centro de Investigación Veterinaria Tandil, (CIVETAN), Argentina;3. CSIRO, PO Box 102, Toowoomba, QLD 4350, Australia;4. Facultad de Ciencias Veterinarias, UNICEN, Campus Universitario, B7000, Tandil, Buenos Aires, Argentina;5. Modasur (Regional network for agricultural modelling research), Argentina;1. Shih Hsin University, Taipei, Taiwan;2. National Chengchi University, Taipei, Taiwan;3. Soochow University, Taipei, Taiwan;1. Muğla Sıtkı Koçman University, Faculty of Medicine, Department of Emergency Medicine;2. Muğla Sıtkı Koçman University, Faculty of Medicine, Department of Infectious Diseases and Clinical Microbiology;3. Muğla Sıtkı Koçman University, Faculty of Medicine, Department of Cardiology |
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| Abstract: | The purpose of this study is to examine the relationship between firm size and time-varying betas of UK stocks. We extend the Schwert and Seguin (1990)(Journal of Finance 45, 1120–1155) methodology by explicitly modeling conditional heteroscedasticity in the market model residual returns. Our results show that the time-varying coefficient is not statistically significant for both small and large firm stock indexes. We also find that accounting for GARCH effects in the Schwert-Seguin market model yields beta estimates that are markedly differently from those when conditional heteroscedasticity is ignored. Event studies that ignore conditional heteroscedasticity may bias the abnormal returns of small and large firms, thereby leading to a different conclusion regarding the significance of an information event. |
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| Keywords: | Time-varying beta GARCH Conditional volatility Systematic risk estimation Event studies |
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