Firm level return–volatility analysis using dynamic panels

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This paper examines “leverage” and volatility feedback effects at the firm level by considering both market and firm level effects, using 242 individual firm stock data in the US market. We adopt a panel vector autoregressive framework which allows us to control simultaneously for common business cycle effects, unobserved cross correlation effects in return and volatility via industry effects, and heterogeneity across firms. Our results suggest that volatility feedback effects at the firm level are present due to both market and firm effects, though the market volatility feedback effect is stronger than the corresponding firm level effect. We also find that the leverage effect at the firm level is persistent, significant and negative, while the effect of market return on firm volatility is persistent, significant and positive. The presence of these effects is further explored through the responses of the model's variables to market-wide return and volatility shocks
Original languageEnglish
Pages (from-to)847–867
Number of pages21
JournalJournal of empirical finance
Issue number5
Early online date23 Jul 2011
Publication statusPublished - Dec 2011


  • Volatility feedback
  • Stock return
  • Leverage effects
  • Panel vector autoregression

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