Conditional volatility and firm size: an empirical analysis of UK equity portfolios

Patricia L. Chelley-Steeley; James M. Steeley

doi:10.1080/758538603

Conditional volatility and firm size: an empirical analysis of UK equity portfolios

Patricia L. Chelley-Steeley, James M. Steeley

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Abstract

The techniques and insights from two distinct areas of financial economic modelling are combined to provide evidence of the influence of firm size on the volatility of stock portfolio returns. Portfolio returns are characterized by positive serial correlation induced by the varying levels of non-synchronous trading among the component stocks. This serial correlation is greatest for portfolios of small firms. The conditional volatility of stock returns has been shown to be well represented by the GARCH family of statistical processes. Using a GARCH model of the variance of capitalization-based portfolio returns, conditioned on the autocorrelation structure in the conditional mean, striking differences related to firm size are uncovered.

Original language	English
Pages (from-to)	433-440
Number of pages	8
Journal	Applied Financial Economics
Volume	5
Issue number	6
DOIs	https://doi.org/10.1080/758538603
Publication status	Published - 1995

Keywords

financial economic modelling
firm size
volatility
stock portfolio returns

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abstract = "The techniques and insights from two distinct areas of financial economic modelling are combined to provide evidence of the influence of firm size on the volatility of stock portfolio returns. Portfolio returns are characterized by positive serial correlation induced by the varying levels of non-synchronous trading among the component stocks. This serial correlation is greatest for portfolios of small firms. The conditional volatility of stock returns has been shown to be well represented by the GARCH family of statistical processes. Using a GARCH model of the variance of capitalization-based portfolio returns, conditioned on the autocorrelation structure in the conditional mean, striking differences related to firm size are uncovered.",

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AB - The techniques and insights from two distinct areas of financial economic modelling are combined to provide evidence of the influence of firm size on the volatility of stock portfolio returns. Portfolio returns are characterized by positive serial correlation induced by the varying levels of non-synchronous trading among the component stocks. This serial correlation is greatest for portfolios of small firms. The conditional volatility of stock returns has been shown to be well represented by the GARCH family of statistical processes. Using a GARCH model of the variance of capitalization-based portfolio returns, conditioned on the autocorrelation structure in the conditional mean, striking differences related to firm size are uncovered.

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Conditional volatility and firm size: an empirical analysis of UK equity portfolios

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