TY - JOUR
T1 - The leverage effect in the UK stock market
AU - Chelley-Steeley, Patricia L.
AU - Steeley, James M.
PY - 2005/3/15
Y1 - 2005/3/15
N2 - This study seeks to explain the leverage in UK stock returns by reference to the return volatility, leverage and size characteristics of UK companies. A leverage effect is found that is stronger for smaller companies and has greater explanatory power over the returns of smaller companies. The properties of a theoretical model that predicts that companies with higher leverage ratios will experience greater leverage effects are explored. On examining leverage ratio data, it is found that there is a propensity for smaller companies to have higher leverage ratios. The transmission of volatility shocks between the companies is also examined and it is found that the volatility of larger firm returns is important in determining both the volatility and returns of smaller firms, but not the reverse. Moreover, it is found that where volatility spillovers are important, they improve out-of-sample volatility forecasts. © 2005 Taylor & Francis Group Ltd.
AB - This study seeks to explain the leverage in UK stock returns by reference to the return volatility, leverage and size characteristics of UK companies. A leverage effect is found that is stronger for smaller companies and has greater explanatory power over the returns of smaller companies. The properties of a theoretical model that predicts that companies with higher leverage ratios will experience greater leverage effects are explored. On examining leverage ratio data, it is found that there is a propensity for smaller companies to have higher leverage ratios. The transmission of volatility shocks between the companies is also examined and it is found that the volatility of larger firm returns is important in determining both the volatility and returns of smaller firms, but not the reverse. Moreover, it is found that where volatility spillovers are important, they improve out-of-sample volatility forecasts. © 2005 Taylor & Francis Group Ltd.
KW - leverage effect
KW - UK
KW - stock returns
KW - return volatility
KW - leverage
KW - size characteristics
KW - UK companies
UR - http://www.scopus.com/inward/record.url?scp=17044420057&partnerID=8YFLogxK
UR - http://www.tandfonline.com/10.1080/0960310052000337669
U2 - 10.1080/0960310052000337669
DO - 10.1080/0960310052000337669
M3 - Article
SN - 0960-3107
VL - 15
SP - 409
EP - 423
JO - Applied Financial Economics
JF - Applied Financial Economics
IS - 6
ER -