Is Unlevered Firm Volatility Asymmetric?

Posted: 8 Jan 2012

See all articles by Hazem Daouk

Hazem Daouk

Cornell University - School of Applied Economics and Management

David T. Ng

Johnson College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 5, 2012

Abstract

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. We show that this difference between index-level asymmetry and firm-level asymmetry is driven by the asymmetry of the unlevered covariance component of index volatility.

Keywords: volatility asymmetry, financial leverage, leverage effect

JEL Classification: G12

Suggested Citation

Daouk, Hazem and Ng, David T., Is Unlevered Firm Volatility Asymmetric? (January 5, 2012). Journal of Empirical Finance, Vol. 18, No. 4, 2011. Available at SSRN: https://ssrn.com/abstract=1980319

Hazem Daouk (Contact Author)

Cornell University - School of Applied Economics and Management ( email )

446 Warren Hall
Ithaca, NY 14853
United States
331-45-78-63-88 (Fax)

HOME PAGE: http://courses.cit.cornell.edu/hd35/

David T. Ng

Johnson College of Business ( email )

301G Warren Hall, Cornell University
Ithaca, NY 14850-1967
United States
6072550145 (Phone)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
966
PlumX Metrics