Systematic Risk and Revenue Volatility
Posted: 10 Jun 2002
We introduce the degree of economic leverage (DEL) as an extension of the existing method of decomposing beta and assess its incremental explanatory power through empirical testing. The DEL is defined as the percentage change in the firm's sales resulting from a unit percentage change attributable to an exogenous economic disturbance. The exogenous economic disturbance employed is the ratio of long-term T-bond rates to short-term T-bill rates. The evidence is supportive of the DEL's role in systematic risk explanation at both the industry and portfolio levels. However, we find mixed results at the firm level.
JEL Classification: G30
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