Leverage and asymmetric volatility: The firm-level evidence

Ericsson, Jan; Huang, Xiao; Mazzotta, Stefano

doi:10.1016/j.jempfin.2016.02.008

Cited by 17 publications

(9 citation statements)

References 27 publications

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“…However, they nd many anomalies in this relationship, which leads to the conclusion that it would be more appropriate to call it a down market eect . Finally, using a large panel of merged CRSP and COMPUSTAT stock data, Ericsson, Huang, and Mazzotta (2007) nd additional evidence in support of the leverage eect hypothesis.…”

Section: Literature Reviewmentioning

confidence: 86%

Volatility smirk as an externality of agency conflict and growing debt

Jaskowski

McAleer

2015

Int J of Economic Theory

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Since the work of Black in the mid‐1970s, the source of the stock market volatility smirk has remained controversial. The volatility smirk is a side effect of agency conflict, and occurs in the optimum, even after resolving the agency conflict. The slope of the smirk increases with the severity of the initial agency conflict between management and investors. It is predicted that the higher is the compensation of the manager, the steeper is the volatility smirk, for both time series and cross‐sections of companies. These results help to disentangle the leverage effect from alternative explanations such as volatility feedback, time‐varying risk premium, and down‐market effects.

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Section: Literature Reviewmentioning

confidence: 86%

Volatility smirk as an externality of agency conflict and growing debt

Jaskowski

McAleer

2015

Int J of Economic Theory

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“…Studies have confirmed that stock returns exhibit leverage effect; a sign that negative stock return innovations increase future volatility than the same magnitude of positive stock return innovations (Ericsson et al, 2016;Koutmos & Saidi, 1995;Long et al, 2014;Smith, 2015). Our results in Table 2, have shown a high level of significance in gamma (γ) with negative coefficients (indicating a negative relationship between stock returns and volatility), demonstrating that the negative stock return innovations in the EGARCH model have more impact on future volatility than positive innovations in all the oil and gas companies except Tullow Oil, Nostrum Oil and Gas Plc, Amec Foster Wheeler, Wood Group (John) and Gulf Marine Services Plc.…”

Section: Oil and Gas Producers (Exploration And Production/integratedmentioning

confidence: 97%

“…While, in the reverse causation, external factors such as technology risk cause the increase in volatility if the firm's return on investment is negatively affected, and the consequence would be the decrease in stock returns. In trying to test the validity of Black's hypothesis, various methodological modifications have been made and findings were found to be either accepting or rejecting the hypothesis (Cox & Ross, 1976;Ericsson et al, 2016;French, Schwert, & Stambaugh, 1987;Gallant, Rossi, & Tauchen, 1992;Linton, Whang, & Yen, 2016;Pindyck, 1984).…”

Section: Review Of Literaturementioning

confidence: 99%

“…Duffee (1995) also observed that using a broader set of sample size will make the results in Christie (1982) disappear. Other tools used in testing Black's hypothesis include conditional heteroscedasticity models (Bollerslev, Litvinova, & Tauchen, 2006;Cheung & Ng, 1992;Engle & Ng, 1993;Linton & Mammen, 2005;Long et al, 2014;Nelson, 1991;Rodriguez & Ruiz, 2012), a nonparametric measure of conditional distributional dominance (Linton et al, 2016), a panel vector autoregression model (Ericsson et al, 2016), and using Fama and French risk factors in the EGARCH process to estimate the leverage effect parameter (Adami, Gough, Muradoglu, & Sivaprasad, 2010;Smith, 2015). Adami et al (2010) have also confirmed the existence of an inverse relationship between stock returns and leverage but became weaker when Fama-French-Carhart's risk factors were used to estimate returns.…”

Section: Review Of Literaturementioning

confidence: 99%

“…The hypothesis has been tested several times since its genesis by many researchers but still, no consensus of whether the negative stock return innovations induce the level of firm's financial leverage or vice versa (Dufour, Garcia, & Taamouti, 2012;Engle & Ng, 1993;Ericsson, Huang, & Mazzotta, 2016). Among the early researchers that tested Black's proposition was Christie (1982).…”

Section: Introductionmentioning

confidence: 99%

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Investigating the sources of Black’s leverage effect in oil and gas stocks

Sanusi

2017

Cogent Economics & Finance

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The Black's leverage effect hypothesis postulates that a negative stock return innovation increases the financial leverage of a firm since the value of equity decreases at a given level of debt, which, in turn, creates a higher equity return volatility in the future. The paper is aimed at investigating the authenticity of the Black's leverage effect hypothesis and the relationship between negative stock returns and the financial leverage of the UK oil and gas stocks from 2004 to 2015. For each stock, exponential generalised autoregressive conditional heteroscedasticity model was estimated using Fama-French-Carhart 4-factor asset pricing model to extract the difference between the effects of negative and positive stock return innovations, regarded as leverage effect. The leverage effect parameter was further regressed on the financial leverage ratios of the book value of long-term debt to total assets, interest expenses to total assets and long-term debt to market value of equity to examine whether variation in the leverage parameter was as a result of variation in the firm's financial leverage. The findings of the study show that Fama-FrenchCarhart four risk factors of market, size effect, value and momentum were significant in the stock returns of most of the oil and gas companies. The mixed results in the significance level of the factors were attributed to the differences in individual firm characteristics. An evidence of leverage effect was also found in all the oil and gas stock returns but no evidence to suggest it was derived from the changes in the

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