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Is Unlevered Firm Volatility Asymmetric?

Author
Daouk, Hazem; Ng, David T.C.
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, which is consistent with theoretical results in Aydemir, Gallmeyer and Hollifield (2006).
Description
WP 2009-23 June 2009 JEL Classification Codes: G12
Date Issued
2009-06-01Publisher
Charles H. Dyson School of Applied Economics and Management, Cornell University
Subject
Volatility asymmetry; Financial leverage
Type
article