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Is Unlevered Firm Volatility Asymmetric?

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Executive Summary

Asymmetric volatility refers to the stylized fact that stock volatility is negatively correlated to stock returns. Traditionally, this phenomenon has been explained by the financial leverage effect. This explanation has recently been challenged in favor of a risk premium based explanation. The authors develop a new, unlevering approach to document how well financial leverage, rather than size, beta, book-to-market, or operating leverage, explains volatility asymmetry on a firm-by-firm basis. The results reveal that, at the firm level, financial leverage explains much of the volatility asymmetry.

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