IDEAS home Printed from https://ideas.repec.org/a/eee/intfin/v31y2014icp178-186.html
   My bibliography  Save this article

The impact of currency movements on asset value correlations

Author

Listed:
  • Byström, Hans

Abstract

This paper looks at the asset correlation bias resulting from firms’ assets and liabilities being denominated in different currencies. It focuses on the time-variation in the bias and on the dependency of the bias on currency movements. Overall, we find that the asset correlation bias for the average pair of firms in the Dow Jones Industrial Average index is significant. The bias fluctuates widely, however, and it has turned negative for shorter periods. The policy implication of the paper is that by ignoring the exchange rate component when computing portfolio credit risk one may materially underestimate the actual risk.

Suggested Citation

  • Byström, Hans, 2014. "The impact of currency movements on asset value correlations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 178-186.
    • Handle: RePEc:eee:intfin:v:31:y:2014:i:c:p:178-186
    DOI: 10.1016/j.intfin.2014.03.014
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042443114000407
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.intfin.2014.03.014?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dirk Tasche, 2007. "Incorporating exchange rate risk into PDs and asset correlations," Papers 0712.3363, arXiv.org.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Byström, Hans, 2016. "The Currency Composition of Firms' Balance Sheets and its Effect on Asset Value Correlations and Capital Requirements," Working Papers 2016:1, Lund University, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Byström, Hans, 2017. "The currency composition of firms' balance sheets, asset value correlations, and capital requirements," Global Finance Journal, Elsevier, vol. 34(C), pages 89-99.
    2. Byström, Hans, 2016. "The Currency Composition of Firms' Balance Sheets and its Effect on Asset Value Correlations and Capital Requirements," Working Papers 2016:1, Lund University, Department of Economics.
    3. Gady Jacoby & Chuan Liao & Jonathan A. Batten, 2007. "A Pure Test for the Elasticity of Yield Spreads," The Institute for International Integration Studies Discussion Paper Series iiisdp195, IIIS.
    4. ilya, gikhman, 2006. "Fixed-income instrument pricing," MPRA Paper 1449, University Library of Munich, Germany.
    5. Gordian Rättich & Kim Clark & Evi Hartmann, 2011. "Performance measurement and antecedents of early internationalizing firms: A systematic assessment," Working Papers 0031, College of Business, University of Texas at San Antonio.
    6. Gerardo Manzo & Antonio Picca, 2020. "The Impact of Sovereign Shocks," Management Science, INFORMS, vol. 66(7), pages 3113-3132, July.
    7. Christophe Hurlin & Jérémy Leymarie & Antoine Patin, 2018. "Loss functions for LGD model comparison," Working Papers halshs-01516147, HAL.
    8. Neus, Werner, 2014. "Eigenkapitalnormen, Boni und Risikoanreize in Banken," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 68(2), pages 92-107.
    9. Giordani, Paolo & Jacobson, Tor & Schedvin, Erik von & Villani, Mattias, 2014. "Taking the Twists into Account: Predicting Firm Bankruptcy Risk with Splines of Financial Ratios," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(4), pages 1071-1099, August.
    10. Ulrike Malmendier & Vincenzo Pezone & Hui Zheng, 2023. "Managerial Duties and Managerial Biases," Management Science, INFORMS, vol. 69(6), pages 3174-3201, June.
    11. Wei, Yu & Wang, Yizhi & Vigne, Samuel A. & Ma, Zhenyu, 2023. "Alarming contagion effects: The dangerous ripple effect of extreme price spillovers across crude oil, carbon emission allowance, and agriculture futures markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    12. Lily Y. Liu, 2017. "Estimating Loss Given Default from CDS under Weak Identification," Supervisory Research and Analysis Working Papers RPA 17-1, Federal Reserve Bank of Boston.
    13. Kern, Markus & Rudolph, Bernd, 2001. "Comparative analysis of alternative credit risk models: An application on German middle market loan portfolios," CFS Working Paper Series 2001/03, Center for Financial Studies (CFS).
    14. Jeremy Leake, 2003. "Credit spreads on sterling corporate bonds and the term structure of UK interest rates," Bank of England working papers 202, Bank of England.
    15. Xin Huang & Hao Zhou & Haibin Zhu, 2012. "Systemic Risk Contributions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 42(1), pages 55-83, October.
    16. Milne, Alistair, 2014. "Distance to default and the financial crisis," Journal of Financial Stability, Elsevier, vol. 12(C), pages 26-36.
    17. Boulanouar, Zakaria & Alqahtani, Faisal & Hamdi, Besma, 2021. "Bank ownership, institutional quality and financial stability: evidence from the GCC region," Pacific-Basin Finance Journal, Elsevier, vol. 66(C).
    18. Richardson, Grant & Taylor, Grantley & Lanis, Roman, 2015. "The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia," Economic Modelling, Elsevier, vol. 44(C), pages 44-53.
    19. Zhijian (James) Huang & Yuchen Luo, 2016. "Revisiting Structural Modeling of Credit Risk—Evidence from the Credit Default Swap (CDS) Market," JRFM, MDPI, vol. 9(2), pages 1-20, May.
    20. Masahiko Egami & Rusudan Kevkhishvili, 2020. "Time reversal and last passage time of diffusions with applications to credit risk management," Finance and Stochastics, Springer, vol. 24(3), pages 795-825, July.

    More about this item

    Keywords

    Asset correlation; Time-variation; Sensitivity; Exchange rate; Currency risk;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:31:y:2014:i:c:p:178-186. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/intfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.