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

Hans Byström

Global Finance Journal, 2017, vol. 34, issue C, 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.

Keywords: Asset correlation; Bias; Exchange rate; Currency composition; Currency mismatch (search for similar items in EconPapers)
JEL-codes: F31 G15 G21 G33 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:34:y:2017:i:c:p:89-99

DOI: 10.1016/j.gfj.2017.03.007

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