Leverage and asymmetric volatility: The firm-level evidence


Authors: Jan Ericsson, Xiao Huang, Stefano Mazzotta

Publication: Journal of Empirical Finance, Volume 38, Part A, September 2016, Pages 1-21


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.

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