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Is Unlevered Firm Volatility Asymmetric?

  • Daouk, Hazem
  • Ng, David T.C.
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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).

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Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 51182.

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Date of creation: 16 Jun 2009
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Handle: RePEc:ags:cudawp:51182
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