New Evidence on Sources of Leverage Effects in Individual Stocks

Geoffrey Peter Smith

The Financial Review, 2015, vol. 50, issue 3, 331-340

Abstract: I test Black's leverage effect hypothesis on a panel of U.S. stocks from 1997 to 2012. I find that negative stock return innovations increase the future volatility of equity returns by about 36% more than positive ones. There is a strong and positive relation between variation in the size of these leverage effects and variation in the firm's use of debt. I uncover this relation by applying the Fama/French/Carhart 4-factor asset pricing model in the exponential generalized autoregressive conditional heteroskedasticity mean equation and by using panel data to control for firm- and time-invariant unobservables via first differences and two-way fixed effects.

Date: 2015
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