The Volatility of a Firm's Assets and the Leverage Effect
University of Illinois at Urbana-Champaign - Department of Finance
Matthew P. Richardson
New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)
August 1, 2015
AFA 2010 Atlanta Meetings Paper
We investigate the volatility of firms’ assets in contrast to existing studies that focus on equity volatility. We estimate asset volatility using a comprehensive dataset on the market values of corporate security returns. We find significant differences between the properties of equity and asset volatilities with implications for several important areas of finance. First, financial leverage has a large influence on equity volatility. Second, leverage and asset volatility have permanent and transitory effects respectively on equity volatility, helping explain the short- and long-run dynamics of equity volatility. Third, we analyze and compare the cross section of asset versus equity returns.
Number of Pages in PDF File: 64
Keywords: time-varying volatility, firm's assets, leverage, feedback effect
JEL Classification: C22, C53, G12
Date posted: March 14, 2009 ; Last revised: September 3, 2015
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