Financial Leverage Does Not Cause the Leverage Effect

45 Pages Posted: 14 Mar 2006

See all articles by Abdullah C. Aydemir

Abdullah C. Aydemir

Lehman Brothers

Michael F. Gallmeyer

University of Virginia (UVA) - McIntire School of Commerce

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business

Date Written: December 2006

Abstract

We quantify the effect of financial leverage on stock return volatility in a dynamic general equilibrium economy with debt and equity claims. We study the effects of financial leverage on the market portfolio, and on a small firm with idiosyncratic and market risk. In an economy with both a constant interest rate and constant price of risk, financial leverage generates little variation in stock return volatility at the market level but significant variation at the individual firm level. In an economy with more realistic variation in interest rates and the price of risk, there is significant variation in stock return volatility at the market and firm level. In such an economy, financial leverage has little effect on the dynamics of stock return volatility at the market level. Financial leverage contributes more to the dynamics of stock return volatility for a small firm.

Keywords: stock volatility, leverage effect, corporate debt, general equilibrium

JEL Classification: G10, G12

Suggested Citation

Aydemir, Abdullah C. and Gallmeyer, Michael F. and Hollifield, Burton, Financial Leverage Does Not Cause the Leverage Effect (December 2006). AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=890609 or http://dx.doi.org/10.2139/ssrn.890609

Abdullah C. Aydemir

Lehman Brothers ( email )

745 Seventh Avenue
New York, NY 10019
United States

Michael F. Gallmeyer (Contact Author)

University of Virginia (UVA) - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-243-4043 (Phone)
434-924-7074 (Fax)

HOME PAGE: http://www.commerce.virginia.edu/faculty_research/facultydirectory/Pages/Gallmeyer.aspx

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-6505 (Phone)
(412) 268-6837 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,063
Abstract Views
4,876
rank
20,551
PlumX Metrics