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Is the Distance to Default a Good Measure in Predicting Bank Failures? Case Studies

  • Kimie Harada
  • Takatoshi Ito
  • Shuhei Takahashi

This paper examines the movements of the Distance to Default (DD), a market-based measure of corporate default risk, of eight failed Japanese banks in order to evaluate the predictive power of the DD measure for bank failures. The DD became smaller in anticipation of failure in many cases. The DD spread, defined as the DD of a failed bank minus the DD of sound banks, was also a useful indicator for deterioration of a failed bank's health. For some banks, neither the DD nor the DD spread predicted the failures. However, those results were partly due to lack of transparency in financial statements and disclosed information.

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File URL: http://www.nber.org/papers/w16182.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16182.

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Date of creation: Jul 2010
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Publication status: published as "Is the Distance to Default a Good Measure in Predicting Bank Failures? A case Study of Japanese Major Banks", (with Takatoshi Ito and Shuhei Takahashi ), Japan and the World Economy, 2013, vol. 27.
Handle: RePEc:nbr:nberwo:16182
Note: IFM ME
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  9. Hoshi, Takeo & Ito, Takatoshi, 2004. "Financial regulation in Japan: a sixth year review of the Financial Services Agency," Journal of Financial Stability, Elsevier, vol. 1(2), pages 229-243, December.
  10. Amadou N. R. Sy & Jorge A. Chan-Lau, 2006. "Distance-To-Default in Banking; A Bridge too Far?," IMF Working Papers 06/215, International Monetary Fund.
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