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Bank insolvency risk and time-varying Z-score measures

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  • Lepetit, Laetitia
  • Strobel, Frank

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

  • Lepetit, Laetitia & Strobel, Frank, 2013. "Bank insolvency risk and time-varying Z-score measures," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 73-87.
    • Handle: RePEc:eee:intfin:v:25:y:2013:i:c:p:73-87
    DOI: 10.1016/j.intfin.2013.01.004
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    More about this item

    Keywords

    Insolvency risk; Z-score; Time-varying; Mean squared error;
    All these keywords.

    JEL classification:

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

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