Browsing by Author "Lee, Shih-Cheng"

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Book-to-Market Equity, Asset Correlations and the Basel Capital Requirement
(2013-09-01)
Lee, Shih-Cheng
;
Lin, Chien-Ting
;
Yu, Min-Teh
;
資訊管理與財務金融系註：原資管所+財金所
;
Department of Information Management and Finance
This paper examines the effect of book-to-market equity (BE/ME) on asset correlations under the Basel capital requirement. We find that BE/ME captures variations in asset correlations after controlling for firm size, default probability and industry effects from 1987 to 2011. Obligors with higher BE/ME exhibit lower asset correlations compared to those with lower BE/ME. Decomposing BE/ME into assets-in-place and growth options based on the asset pricing literature shows that obligors with more assets-in-place or more fixed assets have higher BE/ME and lower asset correlations than those with more growth options. Overall, our findings suggest that BE/ME is an additional important factor that may improve the estimates of asset correlations and thereby banks' capital adequacy.