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Is Unlevered Firm Volatility Asymmetric?

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  • Daouk, Hazem
  • Ng, David T.C.

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, which is consistent with theoretical results in Aydemir, Gallmeyer and Hollifield (2006).

Suggested Citation

  • Daouk, Hazem & Ng, David T.C., 2009. "Is Unlevered Firm Volatility Asymmetric?," Working Papers 51182, Cornell University, Department of Applied Economics and Management.
  • Handle: RePEc:ags:cudawp:51182
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    References listed on IDEAS

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    Cited by:

    1. Smith, Geoffrey Peter, 2016. "Weekday variation in the leverage effect: A puzzle," Finance Research Letters, Elsevier, vol. 17(C), pages 193-196.
    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.

    More about this item

    Keywords

    Volatility asymmetry; Financial leverage; Financial Economics; Research Methods/ Statistical Methods; G12;

    JEL classification:

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

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