Impact Of Financial Leverage On Stock Return Volatility

Introduction to Leverage Leverage is the ability to influence a system, or an environment, in a way that multiplies the outcome of one s efforts without a corresponding increase in the consumption of resources. In different words, leverage is the advantageous condition of having a relatively small amount of cost yield a relatively high level of returns. Indeed, it is extremely important to quantify the effect of financial leverage on stock return volatility in a dynamic general equilibrium economy with debt and equity claims. The effect of financial leverage is studied both at a market and a firm level where the firm is exposed to both idiosyncratic and market risk. In a benchmark economy with both a constant interest rate and constant price of risk, financial leverage generates little variation in stock return volatility at the market level but significant variation at the individual firm level. In an economy that generates time-variation in interest rates and the price of risk, there is significant variati on in stock return volatility at the market and firm level. In such an economy, financial leverage has little effect on the dynamics of stock return volatility at the market level. Financial leverage contributes more to the dynamics of stock return volatility for a small firm. Advantages of Leverage Leveraging business carries some specific benefits that don t escort different ways of business finance. First, leveraging a business carries some risks, however theShow MoreRelatedThe Vanguard Equity Income Fund Investor Essay1136 Words   |  5 Pagesdollars). Its inception date is 21st March, 1988, and its ticker symbol is VEIPX. VEIF-Inv has used the spliced benchmark index: Russell 1000 Value Index through July 31, 2007; FTSE High Dividend Yield Index thereafter. 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