Leverage and Asymmetric Volatility: The Firm Level Evidence

31 Pages Posted: 21 Feb 2007

See all articles by Jan Ericsson

Jan Ericsson

McGill University; Swedish Institute for Financial Research (SIFR)

Xiao Huang

Kennesaw State University

Stefano Mazzotta

Kennesaw State University - Michael J. Coles College of Business

Date Written: February 21, 2007

Abstract

This paper studies the characteristics of firm level equity volatility. There is a lack of consensus in the finance literature as to the relative statistical and economic significance of the leverage and feedback effects on equity volatility. We provide a dynamic framework to investigate simultaneously the leverage and the feedback effects at the firm level. Using the intersection of all firms in CRSP and COMPUSTAT from 1971 to 2005, we build a fixed-effects Panel Vector Autoregression (PVAR) model to investigate the dynamic relationship among leverage, volatility and (realized) risk premium. We find a much larger leverage effect than reported in Christie (1982) and further confirm the leverage effect hypothesis. More importantly, our dynamic model reveals that the leverage effect accumulates over time. The accumulation of the leverage effect over time renders it at least up to five times larger than previously thought. We also study impulse response functions and contemporaneous correlations among the variables and explain their implications.

Keywords: Financial leverage, stock volatility, panel data, VAR

JEL Classification: C33

Suggested Citation

Ericsson, Jan and Huang, Xiao and Mazzotta, Stefano, Leverage and Asymmetric Volatility: The Firm Level Evidence (February 21, 2007). Available at SSRN: https://ssrn.com/abstract=964447 or http://dx.doi.org/10.2139/ssrn.964447

Jan Ericsson

McGill University ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
(514) 398-3186 (Phone)
(514) 398-3876 (Fax)

HOME PAGE: http://people.mcgill.ca/jan.ericsson/

Swedish Institute for Financial Research (SIFR)

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

Xiao Huang

Kennesaw State University ( email )

560 Parliament Garden Way
Kennesaw, GA 30144
United States
(470) 578-6318 (Phone)
(470) 578-9022 (Fax)

Stefano Mazzotta (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

560 Parliament Garden Way
Kennesaw, GA 30144
United States
(470) 578-6341 (Phone)
(470) 578-9022 (Fax)

HOME PAGE: http://www.mazzotta.info

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