The Leverage Effect - Uncovering the true nature of U.S. asymmetric volatility

Sammanfattning: The topic of this thesis is the leverage effect i.e. asymmetric volatility. The leverage effect describes the negative relationship between asset value and volatility. The purpose is to examine if firm specific variables impact the size of the leverage effect, in order to bring additional insights into the missing gap in the research field. The study is conducted on 1,311 U.S. companies active on NASDAQ or the New York Stock Exchange (NYSE) between 1996 and 2015. Two GARCH models are applied to estimate the asymmetric volatility; the GJR-GARCH(1,1) and the EGARCH(1,1) models. Panel data models are used in order to investigate how the firm specific variables influence the leverage effect. The findings of this paper show that two out of the eight used variables significantly impact the leverage effect; the firm size and the beta. One of the variables deemed insignificant is the debt-to-equity ratio, which contradicts the original hypothesis behind the leverage effect by Black (1976). Thus, this study concludes that firm specific variables impact the size of the leverage effect. However, the deemed insignificance for six of the variables show that not all variables influence the leverage effect. Furthermore, the sign and the size of the coefficients differ between the variables, with some being more influential than others.