Size, time‐varying beta, and conditional heteroscedasticity in UK stock returns

Abstract

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.