Firm level return–volatility analysis using dynamic panels

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Publication details

JournalJournal of empirical finance
DateE-pub ahead of print - 23 Jul 2011
DatePublished (current) - Dec 2011
Issue number5
Volume18
Number of pages21
Pages (from-to)847–867
Early online date23/07/11
Original languageEnglish

Abstract

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

    Research areas

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

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