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Is unlevered firm volatility asymmetric?

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  • Daouk, Hazem
  • Ng, David

Abstract

Asymmetric volatility refers to the stylized fact that stock volatility is negatively correlated to stock returns. Traditionally, this phenomenon has been explained by the financial leverage effect. This explanation has recently been challenged in favor of a risk premium based explanation. We develop a new, unlevering approach to document how well financial leverage, rather than size, beta, book-to-market, or operating leverage, explains volatility asymmetry on a firm-by-firm basis. Our results reveal that, at the firm level, financial leverage explains much of the volatility asymmetry. This result is robust to different unlevering methodologies, samples, and measurement intervals. However, we find that financial leverage does not explain index-level volatility asymmetry. We show that this difference between index-level asymmetry and firm-level asymmetry is driven by the asymmetry of the unlevered covariance component of index volatility.

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  • Daouk, Hazem & Ng, David, 2011. "Is unlevered firm volatility asymmetric?," Journal of Empirical Finance, Elsevier, vol. 18(4), pages 634-651, September.
    • Handle: RePEc:eee:empfin:v:18:y:2011:i:4:p:634-651
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    Cited by:

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    2. Kim, Jaeho, 2015. "Bayesian Inference in a Non-linear/Non-Gaussian Switching State Space Model: Regime-dependent Leverage Effect in the U.S. Stock Market," MPRA Paper 67153, University Library of Munich, Germany.
    3. Smith, Geoffrey Peter, 2016. "Weekday variation in the leverage effect: A puzzle," Finance Research Letters, Elsevier, vol. 17(C), pages 193-196.
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    6. Heejoon Han & Eunhee Lee, 2020. "Triple Regime Stochastic Volatility Model with Threshold and Leverage Effects," Korean Economic Review, Korean Economic Association, vol. 36, pages 481-509.

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    More about this item

    Keywords

    Volatility asymmetry Financial leverage Leverage effect;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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