New Evidence on Sources of Leverage Effects in Individual Stocks

I test Black's leverage effect hypothesis on a panel of U.S. stocks from 1997 to 2012. I find that negative stock return innovations increase the future volatility of equity returns by about 36% more than positive ones. There is a strong and positive relation between variation in the size of these leverage effects and variation in the firm's use of debt. I uncover this relation by applying the Fama/French/Carhart 4‐factor asset pricing model in the exponential generalized autoregressive conditional heteroskedasticity mean equation and by using panel data to control for firm‐ and time‐invariant unobservables via first differences and two‐way fixed effects.