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|Title:||Book-to-market equity, operating risk, and asset correlations: Implications for Basel capital requirement|
|Citation:||Journal of International Financial Markets, Institutions and Money, 2012; 22(4):973-989|
|Publisher:||Elsevier BV, North-Holland|
|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.|
|Rights:||Copyright © 2012 Elsevier B.V. All rights reserved.|
|Appears in Collections:||Aurora harvest|
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