The Volatility of a Firm's Assets and the Leverage Effect

64 Pages Posted: 14 Mar 2009 Last revised: 3 Sep 2015

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance; Yonsei University - School of Business

Matthew P. Richardson

Department of Finance, Leonard N. Stern School of Business, New York University

Date Written: August 1, 2015

Abstract

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.

Keywords: time-varying volatility, firm's assets, leverage, feedback effect

JEL Classification: C22, C53, G12

Suggested Citation

Choi, Jaewon and Richardson, Matthew P., The Volatility of a Firm's Assets and the Leverage Effect (August 1, 2015). AFA 2010 Atlanta Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1359368 or http://dx.doi.org/10.2139/ssrn.1359368

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://https://sites.google.com/site/jaewchoi1203

Yonsei University - School of Business ( email )

50 Yonsei-ro, Seodaemun-gu
Seoul, 120-749
Korea, Republic of (South Korea)

Matthew P. Richardson (Contact Author)

Department of Finance, Leonard N. Stern School of Business, New York University ( email )

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Suite 9-190
New York, NY 10012-1126
United States
+1 (212) 998-0349 (Phone)
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