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Type: Journal article
Title: Book-to-market equity, operating risk, and asset correlations: Implications for Basel capital requirement
Author: Lee, S.
Lin, C.
Citation: Journal of International Financial Markets, Institutions and Money, 2012; 22(4):973-989
Publisher: Elsevier BV, North-Holland
Issue Date: 2012
ISSN: 1042-4431
Statement of
Shih-Cheng Lee, Chien-Ting Lin
Abstract: We examine the effect of book-to-market equity (. BE/. ME) on asset correlations in the asymptotic single risk factor (ASRF) framework under the Basel II Accord on regulatory capital requirement. Over a sample period from 1988 to 2007, we find that . BE/. ME is negatively related to asset correlations after controlling for firm size, default probability, and industry effects. Decomposing . BE/. ME into risks of operating leverage and financial leverage according to . Penman et al. (2007) reveals that higher (lower) operating risk are related to lower (higher) asset correlations. Our findings suggest that incorporating risk of operating leverage into the estimation of asset correlations may improve the measurement of a bank's regulatory capital requirement and potentially reduce regulatory capital arbitrage. © 2012 Elsevier B.V.
Keywords: Basel Accord
Asset correlation
Book-to-market equity
Operating risk
Default probability
Rights: Copyright © 2012 Elsevier B.V. All rights reserved.
DOI: 10.1016/j.intfin.2012.05.010
Appears in Collections:Aurora harvest
Business School publications

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