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Bank insolvency risk and time-varying Z-score measures

Author

Listed:
  • Laetitia Lepetit

    () (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)

  • Frank Strobel

    ()

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.

Suggested Citation

  • Laetitia Lepetit & Frank Strobel, 2013. "Bank insolvency risk and time-varying Z-score measures," Post-Print hal-00785646, HAL.
  • Handle: RePEc:hal:journl:hal-00785646
    DOI: 10.1016/j.intfin.2013.01.004,
    Note: View the original document on HAL open archive server: https://hal-unilim.archives-ouvertes.fr/hal-00785646
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    References listed on IDEAS

    as
    1. John H. Boyd & Stanley L. Graham, 1986. "Risk, regulation, and bank holding company expansion into nonbanking," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-17.
    2. Gianni De Nicolo & Abu M. Jalal & John H. Boyd, 2006. "Bank Risk-Taking and Competition Revisited; New Theory and New Evidence," IMF Working Papers 06/297, International Monetary Fund.
    3. Yeyati, Eduardo Levy & Micco, Alejandro, 2007. "Concentration and foreign penetration in Latin American banking sectors: Impact on competition and risk," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1633-1647, June.
    4. Frank Strobel, 2011. "Bank insolvency risk and different approaches to aggregate Z-score measures: a note," Applied Economics Letters, Taylor & Francis Journals, vol. 18(16), pages 1541-1543.
    5. Frank Strobel, 2011. "Bank insolvency risk and Z-score measures with unimodal returns," Applied Economics Letters, Taylor & Francis Journals, vol. 18(17), pages 1683-1685.
    6. Martin Cihak & Heiko Hesse, 2007. "Cooperative Banks and Financial Stability," IMF Working Papers 07/2, International Monetary Fund.
    7. Boyd, John H. & Graham, Stanley L. & Hewitt, R. Shawn, 1993. "Bank holding company mergers with nonbank financial firms: Effects on the risk of failure," Journal of Banking & Finance, Elsevier, vol. 17(1), pages 43-63, February.
    8. Hannan, Timothy H & Hanweck, Gerald A, 1988. "Bank Insolvency Risk and the Market for Large Certificates of Deposit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 203-211, May.
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    More about this item

    Keywords

    Insolvency risk; Z-score; Time-varying; Mean squared error;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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