THE LEVERAGE EFFECT ON THE VALUE PREMIUM VOLATILITY: FROM AN INTERNATIONAL PERSPECTIVE
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Published
Mar 1, 2015
Abstract
This paper investigates the leverage effect on the value premium volatility usingGARCH and TARCH models utilizing a unique dataset, for twenty nine countries. Thefindings show that value premium returns are bigger in developed than in developingcountries and vary from negative values in some countries to positive in other countries,suggesting that different markets may need different long-run investment strategies.Moreover, we show persistence of a finite unconditional variance that appears strongin developed countries but less significant in developing countries. Finally, leverageappears to have asymmetric effects on the value premium in eight countries including:USA, Canada, Denmark, Finland, New Zealand, Sweden, the UK and Poland.
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Keywords
Value premiumLeverage EffectVolatilityConditional VarianceGARCHTARCH
References
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• Black, J., A. (2006). Macroeconomic risk and the Fama-French Three-Factor Model. Managerial Finance 32 (6), 505-517.
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• Black J., A., Fraser, P. and McMillan, G., D. (2007). Are International Value Premiums Driven by the Same set of Fundamentals? International Review of Economics and Finance 16, 113–129.
• Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroscedasticity, Journal of Econometrics 31, 309-328.
• Bollerslev, T. (1987). A conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return. The Review of Economics and Statistics 3, 542-547.
• Bollerslev, T., Litvinova, J. and Tauchen, G. (2006). Leverage and Volatility Feedback Effects in High-Frequency Data. Journal of Financial Econometrics 4(3), 353-384.
• Bollerslev, T., Ray Y. C., and Kenneth F. K. (1992). ARCH Modeling in Finance: a Review of the Theory and Empirical Evidence. Journal of Econometrics 52 (1-2), 5-59.
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• Campbell, J.Y. and Hentschel, L. (1992). No News is Good News: an Asymmetric Model of Changing Volatility in Stock Returns. Journal of Financial Economics 31, 281-331.
• Chan, K. C., Gup, B. E. and Pan, M. S. (1997), International Stock Market Efficiency and Integration: A Study of Eighteen Nations. Journal of Business Finance and Accounting 24: 803–813.
• Chen, N. and Zhang, F. (1998). Risk and return of value stocks. The Journal of Business 71 (4), 501-535.
• Choi, J. (2013) What Drives the Value Premium?: The Role of Asset Risk and Leverage. Review of Financial Studies 26(11): 2845-2875.
• Christie, A. (1982). The stochastic behavior of common stock variance: value, leverage and interest rate effects. Journal of Financial Economics 10, 407-432.
• Daniel, K. and Titman, S. (1997). Evidence on the characteristics of cross sectional variation in stock returns. Journal of Finance 52 (1), 1-33.
• Elgammal, M. and McMillan, D. (2014). Value premium and default risk. Journal of Asset Management. Forthcoming.
• Engle, R.F. (1982), Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of UK Inflation. Econometrica 50, 987-1008.
• Engle, R.F., Lilien, D.M. and Robins, R. P. (1987). Estimating time varying risk Premia in the Term Structure: the ARCH-M Model. Econometrica 55, 391-407.
• Fama, E.F. and French, K.R. (1992). The Cross-Section of Expected Stock Returns. The Journal of Finance 47(2), 427-465.
• Fama, E.F. and French, K.R. (1996). Multifactor Explanations of Asset Pricing Anomalies. Journal of Finance 51, 55-84.
• Fama, E.F. and French, K.R. (1998). Value Versus Growth: the International Evidence. Journal of Finance 53, 1975-1999.
• Fama, E.F. and French, K.R. (2006). The value Premium and the CAPM. The Journal of Finance LXI( 5), 2163-2185.
• Fama, E.F. and French, K.R. (2012). Size, Value, and Momentum in International Stock Returns, Journal of Financial Economics, 105(3), 457-472.
• Garlappi, L., and Yan, H.( 2011). Financial Distress and the Cross‐section of Equity Returns. The Journal of Finance 66(3), 789-822.
• Guidi, F. and Gupta, R. (2013). Market efficiency in the ASEAN Region: Evidence from Multivariate and Cointegration , Applied Financial Economics 23(4), 265- 274.
• Haugen, R. and Baker, N. (1996). Commonality in the Determinants of Expected Stock Returns. Journal of Financial Economics 41, 401–440.
• Jensen, G.R., Mercer, J. M. and Johnson, R.R. (1996). Business condition, monetary policy, and expected security returns. Journal of Financial Economics 40, 213- 237.
• Jensen, G.R. and Mercer., J. M. (2002). Monetary policy and the cross-section of expected stock returns. Journal of Financial Research 25(1), 125 – 139.
• Lakonishok, J., Shleifer, A. and Vishny, R.W. (1994). Contrarian investment, extrapolation, and risk. The Journal of Finance 49 (5) 1541-1578.
• Li, X., Brooks, C. and Miffre, J. (2009). The Value Premium and Time-Varying Volatility”, Journal of Business Finance and Accounting 36 (9) and (10), 1252- 1272.
• Liew, J. and Vassalou, M. (2000). Can book-to-market, size and momentum be risk factors that predict economic growth? Journal of Financial Economics 57 (2), 221-245.
• Ling, C. andKoo, G.S (2012), On Value Premium, Part II: The Explanations. Journal of Mathematical Finance 2, 66-74.
• Karolyi, G.A. and.Stulz, R.M. (1996). Why do markets move together? An investigation of US-Japan stock return co-movement. The Journal of Finance 51, 951-986.
• King, M., Sentana, E. and Wadhwani, S. (1994). Volatility and links between national stock markets. Econometrica 62 (4), 901-933.
• Kogan, L. (2004). Asset Prices and Real Investment. Journal of Financial Economics 73 (3), pp. 411-431.
• Mele, A. (2007). Asymmetric Stock market Volatility and the Cyclical Behaviour of Expected Returns. Journal of Financial Economics, 86 (2), 446-478.
• Penman, S.H., Richardson, S. A., and, Tuna, I. (2007). The Book-to-Price Effect in Stock Returns: Accounting for Leverage. Journal of Accounting Research 45 (2), 427-468.
• Petkova, R., and Zhang, L. (2005). Is Value Riskier than Growth. Journal of Financial Economics 78, 187-202.
• Rigobon, R. and Sack, B. (2003). Measuring the Reaction of Monetary Policy to the Stock Markey. Quarterly Journal of Economics 11(82), 639-669.
• Rouwenhorst, K.G. (1999). Local Return Factors and Turnover in Emerging Stock Markets, The Journal of Finance 54 (4), 1439-1464.
• Vieito, J. P., Murthy, K.V. B. and Tripathi, V. (2013), Market Efficiency in G-20 Countries: The Paradox Of Financial Crisis, Annals of Financial Economics (AFE) 8(1).
• Zhang, Lu, (2005).The Value Premium. Journal of Finance, American Finance Association 60(1), 67-103, 02.
• Athanassakos, G. (2009). Value Versus Growth Stock Returns and the Value Premium: The Canadian Experience 1985–2005. Canadian Journal of Administrative Sciences, 26 (2), 109-121.
• Black, B. (1976). Studies of Stock price Volatility Changes, Proceedings of the 1976 Meetings of the American Statistical Association. Business and Economic Statistics Section, 177-181.
• Black, J., A. (2002). The Impact of Monetary Policy on value and Growth Stocks: an International evaluation, Journal of Asset Management 3(2), 142-172.
• Black, J., A. (2006). Macroeconomic risk and the Fama-French Three-Factor Model. Managerial Finance 32 (6), 505-517.
• Black, J., A. and McMillan, G., D. (2006). Asymmetric Risk Premium in Value and Growth Stocks. International Review of Financial Analysis, 15, 237-246.
• Black J., A., Fraser, P. and McMillan, G., D. (2007). Are International Value Premiums Driven by the Same set of Fundamentals? International Review of Economics and Finance 16, 113–129.
• Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroscedasticity, Journal of Econometrics 31, 309-328.
• Bollerslev, T. (1987). A conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return. The Review of Economics and Statistics 3, 542-547.
• Bollerslev, T., Litvinova, J. and Tauchen, G. (2006). Leverage and Volatility Feedback Effects in High-Frequency Data. Journal of Financial Econometrics 4(3), 353-384.
• Bollerslev, T., Ray Y. C., and Kenneth F. K. (1992). ARCH Modeling in Finance: a Review of the Theory and Empirical Evidence. Journal of Econometrics 52 (1-2), 5-59.
• Cakici, N., Fabozzi, F. and Tan, S. (2013) Size, Value, and Momentum in Emerging Market Stock Returns. Emerging Markets Review 16, 46-65.
• Campbell, J.Y. and Hentschel, L. (1992). No News is Good News: an Asymmetric Model of Changing Volatility in Stock Returns. Journal of Financial Economics 31, 281-331.
• Chan, K. C., Gup, B. E. and Pan, M. S. (1997), International Stock Market Efficiency and Integration: A Study of Eighteen Nations. Journal of Business Finance and Accounting 24: 803–813.
• Chen, N. and Zhang, F. (1998). Risk and return of value stocks. The Journal of Business 71 (4), 501-535.
• Choi, J. (2013) What Drives the Value Premium?: The Role of Asset Risk and Leverage. Review of Financial Studies 26(11): 2845-2875.
• Christie, A. (1982). The stochastic behavior of common stock variance: value, leverage and interest rate effects. Journal of Financial Economics 10, 407-432.
• Daniel, K. and Titman, S. (1997). Evidence on the characteristics of cross sectional variation in stock returns. Journal of Finance 52 (1), 1-33.
• Elgammal, M. and McMillan, D. (2014). Value premium and default risk. Journal of Asset Management. Forthcoming.
• Engle, R.F. (1982), Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of UK Inflation. Econometrica 50, 987-1008.
• Engle, R.F., Lilien, D.M. and Robins, R. P. (1987). Estimating time varying risk Premia in the Term Structure: the ARCH-M Model. Econometrica 55, 391-407.
• Fama, E.F. and French, K.R. (1992). The Cross-Section of Expected Stock Returns. The Journal of Finance 47(2), 427-465.
• Fama, E.F. and French, K.R. (1996). Multifactor Explanations of Asset Pricing Anomalies. Journal of Finance 51, 55-84.
• Fama, E.F. and French, K.R. (1998). Value Versus Growth: the International Evidence. Journal of Finance 53, 1975-1999.
• Fama, E.F. and French, K.R. (2006). The value Premium and the CAPM. The Journal of Finance LXI( 5), 2163-2185.
• Fama, E.F. and French, K.R. (2012). Size, Value, and Momentum in International Stock Returns, Journal of Financial Economics, 105(3), 457-472.
• Garlappi, L., and Yan, H.( 2011). Financial Distress and the Cross‐section of Equity Returns. The Journal of Finance 66(3), 789-822.
• Guidi, F. and Gupta, R. (2013). Market efficiency in the ASEAN Region: Evidence from Multivariate and Cointegration , Applied Financial Economics 23(4), 265- 274.
• Haugen, R. and Baker, N. (1996). Commonality in the Determinants of Expected Stock Returns. Journal of Financial Economics 41, 401–440.
• Jensen, G.R., Mercer, J. M. and Johnson, R.R. (1996). Business condition, monetary policy, and expected security returns. Journal of Financial Economics 40, 213- 237.
• Jensen, G.R. and Mercer., J. M. (2002). Monetary policy and the cross-section of expected stock returns. Journal of Financial Research 25(1), 125 – 139.
• Lakonishok, J., Shleifer, A. and Vishny, R.W. (1994). Contrarian investment, extrapolation, and risk. The Journal of Finance 49 (5) 1541-1578.
• Li, X., Brooks, C. and Miffre, J. (2009). The Value Premium and Time-Varying Volatility”, Journal of Business Finance and Accounting 36 (9) and (10), 1252- 1272.
• Liew, J. and Vassalou, M. (2000). Can book-to-market, size and momentum be risk factors that predict economic growth? Journal of Financial Economics 57 (2), 221-245.
• Ling, C. andKoo, G.S (2012), On Value Premium, Part II: The Explanations. Journal of Mathematical Finance 2, 66-74.
• Karolyi, G.A. and.Stulz, R.M. (1996). Why do markets move together? An investigation of US-Japan stock return co-movement. The Journal of Finance 51, 951-986.
• King, M., Sentana, E. and Wadhwani, S. (1994). Volatility and links between national stock markets. Econometrica 62 (4), 901-933.
• Kogan, L. (2004). Asset Prices and Real Investment. Journal of Financial Economics 73 (3), pp. 411-431.
• Mele, A. (2007). Asymmetric Stock market Volatility and the Cyclical Behaviour of Expected Returns. Journal of Financial Economics, 86 (2), 446-478.
• Penman, S.H., Richardson, S. A., and, Tuna, I. (2007). The Book-to-Price Effect in Stock Returns: Accounting for Leverage. Journal of Accounting Research 45 (2), 427-468.
• Petkova, R., and Zhang, L. (2005). Is Value Riskier than Growth. Journal of Financial Economics 78, 187-202.
• Rigobon, R. and Sack, B. (2003). Measuring the Reaction of Monetary Policy to the Stock Markey. Quarterly Journal of Economics 11(82), 639-669.
• Rouwenhorst, K.G. (1999). Local Return Factors and Turnover in Emerging Stock Markets, The Journal of Finance 54 (4), 1439-1464.
• Vieito, J. P., Murthy, K.V. B. and Tripathi, V. (2013), Market Efficiency in G-20 Countries: The Paradox Of Financial Crisis, Annals of Financial Economics (AFE) 8(1).
• Zhang, Lu, (2005).The Value Premium. Journal of Finance, American Finance Association 60(1), 67-103, 02.
How to Cite
Elgammal, Mohammed, and Basil Al-Najjar. 2015. “THE LEVERAGE EFFECT ON THE VALUE PREMIUM VOLATILITY: FROM AN INTERNATIONAL PERSPECTIVE”. Studies in Business and Economics 18 (1). https://doi.org/10.29117/sbe.2015.0082.
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Articles