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Forecasting Bank Leverage

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Abstract

Standard early warning models to predict bank failures cannot be estimated during periods of few or zero failures, precluding any updating of such models during times of good performance. Here we address this problem using an alternative approach, forecasting the simple leverage ratio (equity/assets) as a continuous variable that does not suffer from the small sample problem. Out-of-sample performance shows some promise as a supplement to the standard approach, despite measurable deterioration in prediction accuracy during the crisis years.

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File URL: http://www.finance.uts.edu.au/research/wpapers/wp176.pdf
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Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 176.

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Length: 34 pages
Date of creation: 01 Dec 2012
Date of revision:
Handle: RePEc:uts:wpaper:176

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Keywords: bank leverage; forecasts; early warning;

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  1. Julapa Jagtiani & James Kolari & Catharine Lemieux & Hwan Shin, 2003. "Early warning models for bank supervision: Simpler could be better," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 49-60.
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