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Firm Level Volatility-Return Analysis using Dynamic Panels

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Author Info
L. Vanessa Smith
Takashi Yamagata

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Abstract

This paper examines "leverage" and volatility feedback effects at the firm level by considering both market effects 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 effects 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.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 08/09.

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Date of creation: May 2008
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Handle: RePEc:yor:yorken:08/09

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Keywords: Volatility Feedback; Stock Return; Leverage Effects; Panel Vector Autoregression;

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