Raffaele Corvino (University of Turin)

Market Leverage & Financial Soundness

Abstract. We develop a nowcasting procedure to generate a high frequency estimate of the firm-level market value of leverage. We estimate a contingent claims model using a non-linear Kalman filter together with daily data on credit default swaps and equity prices for a sample of US non financial-firms. We show that the market value of leverage is (i) systematically lower than the book leverage, (ii) highly counter-cyclical, and (iii) spikes during high stock market volatility clusters. Additionally, fluctuations in market leverage tend to anticipate significant increases in the book leverage and, contrary to book leverage, they do not exhibit any significant time trend in our sample. Using our nowcasting procedure, we also develop a real-time measure of corporate financial soundness and show that market leverage is a key driver of the corporate sector’s time-varying financial fragility.

Joint with Federico Maglione and Beradino Palazzo