Citations (4)



Black's Leverage Effect is not Due to Leverage

Jasmina Hasanhodzic

Boston University

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

February 15, 2011

One of the most enduring empirical regularities in equity markets is the inverse relationship between stock prices and volatility, first documented by Black (1976) who attributed it to the effects of financial leverage. As a company's stock price declines, it becomes more highly leveraged given a fixed level of debt outstanding, and this increase in leverage induces a higher equity-return volatility. In a sample of all-equity-financed companies from January 1972 to December 2008, we find that the leverage effect is just as strong if not stronger, implying that the inverse relationship between price and volatility is not driven by financial leverage.

Number of Pages in PDF File: 25

Keywords: Volatility, Leverage Effect, Return/Volatility Relationship, Time-Varying Expected Return, Behavioral Finance

JEL Classification: G12

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Date posted: February 16, 2011  

Suggested Citation

Hasanhodzic, Jasmina and Lo, Andrew W., Black's Leverage Effect is not Due to Leverage (February 15, 2011). Available at SSRN: http://ssrn.com/abstract=1762363 or http://dx.doi.org/10.2139/ssrn.1762363

Contact Information

Jasmina Hasanhodzic
Boston University ( email )
270 Bay State Road
Boston, MA 02215
United States
HOME PAGE: http://jasminah.com
Andrew W. Lo (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
100 Main Street
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)
HOME PAGE: http://web.mit.edu/alo/www
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN

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