Bank Insolvency Risk and Time-Varying Z-Score Measures

Lepetit, Laetitia; Strobel, Frank

Bank Insolvency Risk and Time-Varying Z-Score Measures

Journal of International Financial Markets, Institutions & Money, Vol. 25, pp. 73-87, 2013; doi:10.1016/j.intfin.2013.01.004

18 Pages Posted: 23 Mar 2014 Last revised: 20 May 2015

See all articles by Laetitia Lepetit

Laetitia Lepetit

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE)

Frank Strobel

University of Birmingham - Department of Economics

Date Written: July 1, 2013

Abstract

We compare the different existing approaches to the construction of time-varying Z-score measures, plus an additional alternative one, using a panel of banks for the G20 group of countries covering the period 1992-2009.We examine which ways of estimating the moments used in these different approaches best fit the data, using a simple root mean squared error criterion. Our results are supportive of our alternative time-varying Z-score measure: it uses mean and standard deviation estimates of the return on assets calculated over full samples combined with current values of the capital-asset ratio, and is thus straightforward to implement.

Keywords: insolvency risk, Z-score, time-varying, mean squared error

JEL Classification: G21

Suggested Citation: Suggested Citation

Lepetit, Laetitia and Strobel, Frank, Bank Insolvency Risk and Time-Varying Z-Score Measures (July 1, 2013). Journal of International Financial Markets, Institutions & Money, Vol. 25, pp. 73-87, 2013; doi:10.1016/j.intfin.2013.01.004, Available at SSRN: https://ssrn.com/abstract=2412678