סמינר במימון חשבונאות

Qi Zeng , University of Melbourne

We show that time-varying financial leverage generates a common factor structure in firm-level idiosyncratic stock return volatilities (IVOL).

A sufficient condition is to have sticky debt in a model where asset returns follow a simple linear single factor structure with constant volatility.

Under reasonable parameter settings in a standard dynamic capital structure model, we numerically show that on average about 25% of the

time variation in firm-level IVOL can be explained by a single factor. This proportion reduces to zero when using a purely equity financed sample.

We also show that the exposure to the common IVOL factor is negatively priced, even though IVOL is positively priced in the cross-section.