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Time-varying Z-score measures for bank insolvency risk: Best practice

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  • Bouvatier, Vincent
  • Lepetit, Laetitia
  • Rehault, Pierre-Nicolas
  • Strobel, Frank

Abstract

We evaluate several alternative approaches to constructing time-varying Z-scores as bank insolvency risk measures. Focusing on US and European banks during the financial crisis of 2007–2008, we compare the different measures considered using a range of alternative testing procedures. For both US and European data, Z-scores computed with the exponentially weighted moments method are shown to be preferable to those computed with the more commonly used moving moments approach. Generally, or if only simple moving moments are used, Z-scores computed with current values of the capital-asset ratio are recommended.

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  • Bouvatier, Vincent & Lepetit, Laetitia & Rehault, Pierre-Nicolas & Strobel, Frank, 2023. "Time-varying Z-score measures for bank insolvency risk: Best practice," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 170-179.
    • Handle: RePEc:eee:empfin:v:73:y:2023:i:c:p:170-179
    DOI: 10.1016/j.jempfin.2023.06.002
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    More about this item

    Keywords

    Z-score; Bank; Insolvency risk; Risk measure;
    All these keywords.

    JEL classification:

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

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