Is the "Leverage Effect" a Leverage Effect?
The quot;leverage effectquot; refers to the well-established relationship between stock returns and both implied and realized volatility: volatility increases when the stock price falls. A standard explanation ties the phenomenon to the effect a change in market valuation of a firm's equity has on the degree of leverage in its capital structure, with an increase in leverage producing an increase in stock volatility. We use both returns and directly measured leverage to examine this hypothetical explanation for the quot;leverage effectquot; as itapplies to the individual stocks in the Samp;P100 (OEX) index, and to the index itself. We find a strong quot;leverage effectquot; associated with falling stock prices, but also numerousanomalies that call into question leverage changes as the explanation. These include thefacts that the effect is much weaker or nonexistent when positive stock returns reduce leverage; it is too small with measured leverage for individual firms, but much too large for OEX implied volatilities; the volatility change associated with a given change in leverage seems to die out over a few months; and there is no apparent effect on volatility when leverage changes because of a change in outstanding debt or shares, only when stock prices change. In short, our evidence suggests that the quot;leverage effectquot; is really a quot;down market effectquot; that may have little direct connection to firm leverage
Year of publication: |
[2008]
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Authors: | Figlewski, Stephen |
Other Persons: | Wang, Xiaozu (contributor) |
Publisher: |
[2008]: [S.l.] : SSRN |
Saved in:
freely available
Extent: | 1 Online-Ressource (40 p) |
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Series: | NYU Working Paper ; No. FIN-00-037 |
Type of publication: | Book / Working Paper |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments November 2000 erstellt |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10012768945
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