Document Type : Research Paper

Authors

• Teimur Mohammadi ¹
• Mohammad Reza Feghhi Kashani ²
• Mahdi Samei

¹ Department of Theoretical Economics, Faculty of Economics, Allameh Tabatabai University

² Department of Business Economics , Faculty of Economics , Allameh Tabatabai University

Abstract

The negative correlation between an asset’s volatility and its return is known as the “leverage effect”. This relation is explained by the effect of the return of a firm’s equity on the degree of leverage in its capital structure. If this relation holds, the increased volatility resulting from a fall in stock price should be comparable with the decreased volatility resulting from a price rise with the same magnitude and also, this effect should be persistent. Most of the researches in the “leverage effect” examine the relation between volatility and stock return. To examine the effects of both returns and financial leverage on volatility data from the 22 biggest companies from March 2009 to March 2019 in Tehran Stock Exchange are collected. To find the leverage the value of debt in the capital structure of selected companies is calculated using Geske compound option pricing model. The data show the leverage effect only in negative returns and may have a negligible direct connection to the firm leverage.

Keywords

• Leverage Effect
• Financial Leverage
• Compound Option
• Return Volatility

Main Subjects

• Financial Economics