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

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

Jaewon Choi

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); AQR Capital Management, LLC

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

Matthew P. Richardson (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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