Skip repeated menu and go directly to contents

San Diego State University

Fowler College of
Business Administration

Intellectual Contribution

Variance Risk Premia and Capital Structure
Lotfaliei, B.
Type of Research
Date Published
2014, Before July
Contribution Type
Working paper
This paper shows that the optimal leverage decreases with asset volatility risk in a trade-off framework. Thus, the paper relates the asset volatility risk premium to the underleverage puzzle. In models without volatility risk, the paper empirically documents that underleverage increases with the assets' volatility risk premium. In particular, the underleverage is most important for investment-grade firms with low historical volatility and high volatility risk premium. With volatility risk, two models in standard trade-off settings show that a higher premium implies lower leverage. Empirically, the models' calibration leaves no significant underleverage patterns in the cross-section of the firms. Hence, high asset volatility risk premia contributes to the apparent underleverage in the firms with relatively low historical asset volatility.