Capital asset pricing model: A time-varying volatility approach

Abstract

In this paper, we propose a methodology to conduct uniform inference of volatility in the capital asset pricing model (CAPM). To that end, relevant theory is employed to construct the uniform confidence band of the volatility in the CAPM. The methodology is applied to the U.S. stock return data. The empirical results show strong evidence of co-movement among the volatility estimates for six U.S. stocks of large market capitalization. The hypothesis of constant volatility for the CAPM is rejected unanimously, mainly due to the surge in volatility in the early 2000s and during the 2008 financial crisis. (c) 2016 Elsevier B.V. All rights reserved.