An Empirical Assessment of the Z-Score Test in Correlation with Bank Risk Computation

8 Pages Posted: 13 Sep 2018

See all articles by Frederick Anning

Frederick Anning

Fordham University, School of Law

Date Written: September 5, 2018

Abstract

We by this paper try to do a comparative review of the various approaches in deducing a measure for time-varying z-score. We however employ several modules as part of our assessment in computing the elements of our z-score, we also look at the optimal time length and data frequency through which we do our computation. We then assess how our empirical findings will be in support of our computation, which employ’s the rolling mean as well as our standard deviation i.e. the range-based volatility of the Return on Asset, as a summation of the initial period value of the equity to asset ratio. Having done that, we then make propositions regarding our new systemic risk computation in respect of the z-score, which is however the aggregate z-score net the z-score of an individual bank thus defining a module Leave-One-Out as a contributory factor to the systemic risk of the bank. It is worthy to note that the net Aggregate of the z-score to an individual banks z-score, thus reveals the systematic importance of the banks under review within a particular jurisdiction and based on that we then deduce a risk-adjustment of the z-score, so as to ascertain its effectiveness by capturing the systemic and individual risks of the respective bank.

Keywords: Risk, Bank, Solvency, Z-score, Systemic risk

JEL Classification: E00, E02, G28

Suggested Citation

Anning, Frederick, An Empirical Assessment of the Z-Score Test in Correlation with Bank Risk Computation (September 5, 2018). Available at SSRN: https://ssrn.com/abstract=3244834 or http://dx.doi.org/10.2139/ssrn.3244834

Frederick Anning (Contact Author)

Fordham University, School of Law ( email )

New York, NY
United States

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