The Impact of Currency Movements on Asset Value Correlations

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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.
Original languageEnglish
Pages (from-to)178-186
JournalJournal of International Financial Markets, Institutions, and Money
Volume31
DOIs
Publication statusPublished - 2014

Subject classification (UKÄ)

  • Economics

Keywords

  • Asset correlation
  • Time-variation
  • Currency risk
  • Sensitivity
  • Exchange rate

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