Book-to-market equity, operating risk, and asset correlations: Implications for Basel capital requirement

► We examine the effect of book-to-market equity on asset correlations. ► BE/ME is negatively related to asset correlations. ► BE/ME is positively related to operating risk of a firm. ► Operating risk of a firm is therefore negatively related to lower asset correlations. ► Incorporating operating risk may improve regulatory capital adequacy for banks.