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The currency composition of firms' balance sheets, asset value correlations, and capital requirements

Byström, Hans LU (2017) In Global Finance Journal 34. p.89-99
Abstract

We extend the Tasche (2007) model on the asset correlation bias caused by a currency mismatch between assets and liabilities to the more realistic situation where just some assets and liabilities are denominated in a foreign currency. To test the significance of the remaining bias we rely on a unique database constructed by the Inter-American Development Bank (IADB) containing time-series of the asset and liability currency composition of firms in some Latin American countries. We find that the asset correlation bias and associated underestimations of Basel II capital charges are economically significant even when we account for the actual (partial) currency mismatch.

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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
asset correlation, bias, currency composition, currency mismatch, exchange rate, F31, G21, G33, G15
in
Global Finance Journal
volume
34
pages
11 pages
publisher
Elsevier
external identifiers
  • scopus:85016610526
  • wos:000416271700007
ISSN
1044-0283
DOI
10.1016/j.gfj.2017.03.007
language
English
LU publication?
yes
id
42595f34-f19d-46cd-8ebf-939d181ed1ca
date added to LUP
2017-04-25 10:00:23
date last changed
2018-01-16 13:25:49
@article{42595f34-f19d-46cd-8ebf-939d181ed1ca,
  abstract     = {<p>We extend the Tasche (2007) model on the asset correlation bias caused by a currency mismatch between assets and liabilities to the more realistic situation where just some assets and liabilities are denominated in a foreign currency. To test the significance of the remaining bias we rely on a unique database constructed by the Inter-American Development Bank (IADB) containing time-series of the asset and liability currency composition of firms in some Latin American countries. We find that the asset correlation bias and associated underestimations of Basel II capital charges are economically significant even when we account for the actual (partial) currency mismatch.</p>},
  author       = {Byström, Hans},
  issn         = {1044-0283},
  keyword      = {asset correlation,bias,currency composition,currency mismatch,exchange rate,F31,G21,G33,G15},
  language     = {eng},
  pages        = {89--99},
  publisher    = {Elsevier},
  series       = {Global Finance Journal},
  title        = {The currency composition of firms' balance sheets, asset value correlations, and capital requirements},
  url          = {http://dx.doi.org/10.1016/j.gfj.2017.03.007},
  volume       = {34},
  year         = {2017},
}