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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26702
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| Title: | Is the "Leverage Effect" a Leverage Effect? |
| Authors: | Figlewski, Stephen
Wang, Xiaozu |
| Issue Date: | 6-Nov-2000 |
| Series/Report no.: | FIN-00-037 |
| Abstract: | The "leverage effect" 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 "leverage
effect" as it applies to the individual stocks in the S&P100
(OEX) index, and to the index itself. We find a strong "leverage
effect" associated with falling stock prices, but also numerous
anomalies that call into question leverage changes as the explanation.
These include the facts 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 "leverage effect" is really a
"down market effect" that may have little direct connection to
firm leverage. |
| URI: | http://hdl.handle.net/2451/26702 |
| Appears in Collections: | Finance Working Papers
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