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Leverage and valuation effects: How global liquidity shapes sectoral balance sheets

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  • Carvalho, Daniel

Abstract

Global financial conditions have been shown to be important drivers of cross-border capital flows. But how do they interact with the leverage of the domestic sectors? That is the question this paper proposes to answer. Financial and non-financial sectors increase their leverage pro-cyclically, i.e., during periods of favourable domestic economic performance and whenever global financial conditions are more loose. The general government is an exception: it has a stabilizing counter-cyclical role, by taking on more debt in times of worse economic outcomes. Moreover, there is an important interaction between financial market stress and leverage, whereby heightened financial stress leads to higher leverage via the valuation component of balance sheets - this relationship vanishes when leverage measures are stripped of these price swings.

Suggested Citation

  • Carvalho, Daniel, 2020. "Leverage and valuation effects: How global liquidity shapes sectoral balance sheets," International Review of Financial Analysis, Elsevier, vol. 72(C).
  • Handle: RePEc:eee:finana:v:72:y:2020:i:c:s105752192030209x
    DOI: 10.1016/j.irfa.2020.101565
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    More about this item

    Keywords

    Leverage; Sectoral balance sheets; Holding gains/losses; Global liquidity; Procyclicality JEL no.: G21; G23; G32;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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