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Financial Leverage Does Not Cause the Leverage Effect

Author

Listed:
  • A. Cevdet Aydemir
  • Michael Gallmeyer

    (Dept. of Finance Texas A&M University)

  • Burton Hollifield

Abstract

We quantify the effect of financial leverage on stock return volatility in a dynamic general equilibrium economy with debt and equity claims. We study the effects of financial leverage on the market portfolio, and on a small firm with idiosyncratic and market risk. In an economy with both a constant interest rate and constant price of risk, financial leverage generates little variation in stock return volatility at the market level but significant variation at the individual firm level. In an economy with more realistic variation in interest rates and the price of risk, there is significant variation in stock return volatility at the market and firm level. In such an economy, financial leverage has little effect on the dynamics of stock return volatility at the market level. Financial leverage contributes more to the dynamics of stock return volatility for a small firm

Suggested Citation

  • A. Cevdet Aydemir & Michael Gallmeyer & Burton Hollifield, 2006. "Financial Leverage Does Not Cause the Leverage Effect," 2006 Meeting Papers 263, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:263
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    Citations

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    Cited by:

    1. Thilo A. Schmitt & Rudi Schafer & Holger Dette & Thomas Guhr, 2015. "Quantile Correlations: Uncovering temporal dependencies in financial time series," Papers 1507.04990, arXiv.org.
    2. Chorro, Christophe & Guégan, Dominique & Ielpo, Florian & Lalaharison, Hanjarivo, 2018. "Testing for leverage effects in the returns of US equities," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 290-306.
    3. Thilo A. Schmitt & Rudi Schäfer & Holger Dette & Thomas Guhr, 2015. "Quantile Correlations: Uncovering Temporal Dependencies In Financial Time Series," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(07), pages 1-16, November.
    4. Alina Synyavska & Numan Ülkü, 2015. "'Leverage Effect' in country betas and volatilities?," Applied Economics Letters, Taylor & Francis Journals, vol. 22(11), pages 848-853, July.
    5. Christophe Chorro & Dominique Guegan & Florian Ielpo & Hanjarivo Lalaharison, 2017. "Testing for Leverage Effects in the Returns of US Equities," Post-Print halshs-00973922, HAL.
    6. Philippe Masset & Martin Wallmeier, 2010. "A High†Frequency Investigation of the Interaction between Volatility and DAX Returns," European Financial Management, European Financial Management Association, vol. 16(3), pages 327-344, June.
    7. Huang, Jing-Zhi & Ni, Jun & Xu, Li, 2022. "Leverage effect in cryptocurrency markets," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    8. Daouk, Hazem & Ng, David, 2011. "Is unlevered firm volatility asymmetric?," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 634-651, September.
    9. Ceylan, Ozcan, 2012. "Time-Varying Volatility Asymmetry: A Conditioned HAR-RV(CJ) EGARCH-M Model," GIAM Working Papers 12-4, Galatasaray University Economic Research Center.
    10. Christophe Chorro & Dominique Guegan & Florian Ielpo & Hanjarivo Lalaharison, 2014. "Testing for Leverage Effect in Financial Returns," Documents de travail du Centre d'Economie de la Sorbonne 14022, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.

    More about this item

    Keywords

    stock volatility; leverage effect; general equilibrium;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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