Leonardo Elias

Do global credit conditions affect local credit and business cycles? Using a large cross-section of equity and corporate bond market returns around the world, we construct a novel global credit factor and a global risk factor that jointly price the international equity and bond cross-section. We uncover a global credit cycle in risky asset returns, which is distinct from the global risk cycle. We document that the global credit cycle in asset returns translates into a global credit cycle in credit quantities, with a tightening in global credit conditions

predicting extreme capital flow episodes and declines in the stock of country-level private debt. Furthermore, global credit conditions predict the mean and left tail of real GDP growth outcomes at the country-level. Thus, the global pricing of corporate credit is a fundamental factor in driving local credit conditions and real outcomes.

Productive firms can access credit markets directly—by issuing corporate bonds—or in an intermediated manner—by borrowing through loans. In this paper, we study how the macroeconomic environment, including inflation, the stage of business cycle, and the stance of monetary policy, affects firms’ decisions of which debt market to access. Tighter monetary policy leads to firms borrowing more using intermediated credit, while higher inflation rates lead firms to lock in financing rates by issuing corporate bonds. Moreover, we also explore the role that heterogeneity in leverage across different types of financial institutions plays in the composition of nonfinancial firms’ financing. We show that increases in leverage in the traditional banking sector lead to a substitution from loans into bonds.

Comprehensive granular data on firms’ access to international credit markets and its determinants is instrumental in answering a wide set of questions in international macroeconomics and finance. We describe how to put together data on primary market issuance and secondary market pricing, how to track debt securities over their lifetimes on firms’ balance sheets, and how to match bond-level information to financial statements of the ultimate corporate parents. We illustrate the importance of using comprehensive data on corporate bonds over their lifecycle by documenting a high propensity of early maturity, procyclicality of the propensity to prepay, and a resulting procyclicality of effective time-to-maturity.

What are the real costs of reversals in international capital flows? In this paper, I exploit plausibly exogenous variation in firms' exposure to rollover risk to identify a causal liquidity channel at play during sudden stop episodes. Using a panel of firms across 39 countries, I show that firms with higher exposure (as measured by the share of long-term debt maturing over the next year) reduce investment ten percentage points more than non-exposed firms following sudden stops in capital flows. The impact is persistent: exposed firms experience lower investment, lower employment and lower assets than non-exposed firms even three years after the initial shock. In robustness tests, I show that the results are specific to sudden stop episodes in that they do not hold in periods without sudden stops, and they hold across sudden stop episodes regardless of whether the sudden stop takes place during large economic contractions.

We derive a long-run risk model with time-varying inflation non-neutrality and show that it matches a challenging set of moments describing the joint dynamics of stock returns, term structure of nominal bond yields and returns, as well as macroeconomic fundamentals. Furthermore, we match not only more moments than other long-run risk models, but also moments that remained unaddressed in the literature so far, i.e., the volatility of the risk-free rate and of the dividend-price ratio, and the dividend-price ratio ability to predict stock market returns, consumption and dividend growth rates. More importantly, we match this challenging set of moments, while simultaneously holding the risk aversion and elasticity of intertemporal substitution parameters low.

I show that plausibly exogenous capital inflows drive boom-bust credit cycles and, more importantly, also drive cyclical changes in issuer credit quality; as credit booms disproportionately affect credit conditions faced by low-quality firms. I also show that deterioration in corporate issuer credit quality is a better predictor of a country's subsequent GDP growth than measures of aggregate corporate credit growth. I uncover a corporate balance sheet channel that helps explain why credit booms predict lower GDP growth. Underperformance of low quality firms that lever-up, especially during credit booms, explains a significant part of the growth decline. Low quality firms reduce capital expenditures and employment disproportionately more than good quality firms during a creditbust. The results are consistent with a global credit cycle that pushes capital into countries/firms irrespective of their own investment opportunities and repayment capacity.

I study the effects of US Macroeconomic surprises on the pricing of sovereign risk of sixty-six countries in the period 2002-2017 using daily CDS data. I also explore how a country spread's sensitivity to these shocks depends on a wide range of country characteristics. I discuss potential transmission mechanisms of sovereign distress to the real economy by studying the cross-sectional response of security prices (corporate CDS spreads and stock returns) to global shocks. I find that positive macroeconomic surprises in the US systematically reduce sovereign spreads consistent with the view that global investors price sovereign risk. However, I find that both the size and the sign of the effect depend on the business cycle in the US. During contractionary periods the positive effect of news is greatly reduced, often erased, and sometimes reversed. I also find evidence of asymmetric and non-linear effects. Moreover, I find that country characteristics such as its credit rating, its debt-to-GDP ratio, and measures of economic integration play a crucial role in determining the country's response to US shocks.