The asymmetric behavior and procyclical impact of asset correlations

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dc.contributor.authorLee, S.
dc.contributor.authorLin, C.
dc.contributor.authorYang, C.
dc.date.issued2011
dc.description.abstractThis paper examines the behavior of asset correlations with the market returns in the asymptotic single risk factor (ASRF) approach of the Basel II accord on regulatory capital requirement. Over a sample period from 1988 to 2007, we find that asset correlations are positively related to firm size, but negatively related to firm default probability. Asset correlations are also industry specific, as firms in media, transportation, pharmaceutical, and semiconductor industries exhibit higher asset correlations than those in retail and consumer staples. Most importantly, asset correlations are asymmetric and have a procyclical impact on the real economy after controlling for these effects. They tend to rise during economic downturns, but decline during economic upturns. The average magnitude of the rise is larger than that of the decline. These findings suggest that asset correlations may be underestimated during economic downturns, and may provide policy implications for the capital requirement framework. © 2011 Elsevier B.V.
dc.description.statementofresponsibilityShih-Cheng Lee, Chien-Ting Lin and Chih-Kai Yang
dc.identifier.citationJournal of Banking and Finance, 2011; 35(10):2559-2568
dc.identifier.doi10.1016/j.jbankfin.2011.02.014
dc.identifier.issn0378-4266
dc.identifier.issn1872-6372
dc.identifier.urihttp://hdl.handle.net/2440/68251
dc.language.isoen
dc.publisherElsevier Science BV
dc.rightsCopyright 2011 Elsevier B.V. All rights reserved.
dc.source.urihttps://doi.org/10.1016/j.jbankfin.2011.02.014
dc.subjectBasel accord
dc.subjectAsset correlation
dc.subjectSize effect
dc.subjectDefault probability
dc.subjectProcyclicality
dc.titleThe asymmetric behavior and procyclical impact of asset correlations
dc.typeJournal article
pubs.publication-statusPublished

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