Leverage and asymmetric volatility: The firm-level evidence

Jan Ericsson, Xiao Huang and Stefano Mazzotta

Journal of Empirical Finance, 2016, vol. 38, issue PA, 1-21

Abstract: The relative statistical and economic significance of the leverage and feedback effects on firm-level equity volatility remain an open issue. We use a dynamic panel vector autoregression framework to investigate both effects simultaneously for all firms in CRSP and COMPUSTAT from 1971 to 2013. Crucially, we allow financial leverage, volatility and risk premia to influence each other over time. We find a much larger leverage effect than reported in Christie (1982). Importantly, we find that a change in leverage has a prolonged effect on volatility. The cumulative leverage effect is up to five times larger in twelve quarters than a static model would predict for one quarter.

Keywords: Financial leverage; Stock volatility; Panel data; Vector autoregression (search for similar items in EconPapers)
JEL-codes: C33 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:38:y:2016:i:pa:p:1-21

DOI: 10.1016/j.jempfin.2016.02.008

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