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Is hazard or probit more accurate in predicting financial distress? Evidence from U.S. bank failures

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  • Cole, Rebel A.
  • Wu, Qiongbing

Abstract

We compare the out-of-sample forecasting accuracy of the time-varying hazard model developed by Shumway (2001) and the one-period probit model used by Cole and Gunther (1998). Using data on U.S. bank failures from 1985 – 1992, we find that, from an econometric perspective, the hazard model is more accurate than the probit model in predicting bank failures, but this improvement in accuracy results from incorporating more recent information in the hazard, but not the probit, model. When we limit both models to the same information set, we find that the one-period probit model is slightly more accurate than the time-varying hazard model. We also find that a parsimonious specification of the one-period probit model fit to data from the 1980s performs surprisingly well in forecasting bank failures during 2009 – 2010.

Suggested Citation

  • Cole, Rebel A. & Wu, Qiongbing, 2009. "Is hazard or probit more accurate in predicting financial distress? Evidence from U.S. bank failures," MPRA Paper 24688, University Library of Munich, Germany, revised 01 Aug 2010.
  • Handle: RePEc:pra:mprapa:24688
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    References listed on IDEAS

    as
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    1. Cullen F. Goenner, 2020. "Uncertain times and early predictions of bank failure," The Financial Review, Eastern Finance Association, vol. 55(4), pages 583-601, November.
    2. Kay Giesecke & Baeho Kim, 2011. "Systemic Risk: What Defaults Are Telling Us," Management Science, INFORMS, vol. 57(8), pages 1387-1405, August.
    3. Bi-Juan Chang & Jow-Ran Chang & Mao-Wei Hung, 2014. "Searching For Landmines In Equity Markets," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-24.

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    More about this item

    Keywords

    bank; bank failure; failure prediction; financial crisis; forecasting; hazard model; probit model; static model; time-varying covariates;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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