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The leverage effect in the UK stock market

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  • Patricia Chelley-Steeley
  • James Steeley

Abstract

This study seeks to explain the leverage effect in UK stock returns by reference to the return volatility, leverage and size characteristics of UK companies. A leverage effect is found that is stronger for smaller companies and has greater explanatory power over the returns of smaller companies. The properties of a theoretical model that predicts that companies with higher leverage ratios will experience greater leverage effects are explored. On examining leverage ratio data, it is found that there is a propensity for smaller companies to have higher leverage ratios. The transmission of volatility shocks between the companies is also examined and it is found that the volatility of larger firm returns is important in determining both the volatility and returns of smaller firms, but not the reverse. Moreover, it is found that where volatility spillovers are important, they improve out-of-sample volatility forecasts.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/0960310052000337669
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 15 (2005)
Issue (Month): 6 ()
Pages: 409-423

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Handle: RePEc:taf:apfiec:v:15:y:2005:i:6:p:409-423

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Cited by:
  1. Conrad, Christian & Weber, Enzo, 2013. "Measuring Persistence in Volatility Spillovers," University of Regensburg Working Papers in Business, Economics and Management Information Systems 473, University of Regensburg, Department of Economics.
  2. Johansson, Anders C. & Ljungwall, Christer, 2009. "Spillover Effects Among the Greater China Stock Markets," World Development, Elsevier, vol. 37(4), pages 839-851, April.

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