Is Unlevered Firm Volatility Asymmetric? Daouk, Hazem; Ng, David

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Daouk, Hazem ; Ng, David
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Journal of Empirical Finance
Leverage; Leverage (Finance); Banking, finance and accounting industries
To link to full-text access for this article, visit this link: Byline: Hazem Daouk, David Ng Keywords: Volatility asymmetry; Financial leverage; Leverage effect 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. Article History: Received 18 April 2009; Revised 16 July 2010; Accepted 9 May 2011 Article Note: (footnote) [star] We thank Utpal Bhattacharya, Anchada Charoenrook, Tim Crack, Robert Dittmar, Michael Gallmeyer, Robert Hodrick, Craig Holden, Robert Jennings, Dan Jubinski, Sreenivas Kamma, Josef Lakonishok, Charles Lee, Jun Pan, Lasse Pedersen, Richard Shockley, Albert Wang, Xiaoyan Zhang, and Guofu Zhou, as well as seminar participants at Amsterdam, Cornell, Cincinnati, HEC Paris, Illinois, Maryland, Oklahoma, Queen's, Singapore Management, UC Riverside, Washington, and York Universities, the American Finance Association meeting, the Western Finance Association meeting, the University of Chicago-CRSP forum and the Frank Batten Young Scholars Conference for helpful discussions and comments. We thank Ajay Palvia and Jiyoun An for excellent research assistance. Hazem Daouk acknowledges financial support from the Peter J. and Stephanie J. Nolan Professorship of Finance. Remaining errors are our own.
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