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

Vincent Bouvatier; Laetitia Lepetit; Pierre-Nicolas Rehault; Frank Strobel

doi:10.1016/j.jempfin.2023.06.002

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

Vincent Bouvatier, Laetitia Lepetit^*, Pierre-Nicolas Rehault, Frank Strobel

^*Corresponding author for this work

Economics

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Pages (from-to)	170-179
Number of pages	10
Journal	Journal of Empirical Finance
Volume	73
Early online date	19 Jun 2023
DOIs	https://doi.org/10.1016/j.jempfin.2023.06.002
Publication status	Published - Sept 2023

Keywords

Z-score
bank
insolvency risk
risk measure

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Cite this

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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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author = "Vincent Bouvatier and Laetitia Lepetit and Pierre-Nicolas Rehault and Frank Strobel",

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AU - Bouvatier, Vincent

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AU - Strobel, Frank

PY - 2023/9

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AB - 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.

KW - Z-score

KW - bank

KW - insolvency risk

KW - risk measure

U2 - 10.1016/j.jempfin.2023.06.002

DO - 10.1016/j.jempfin.2023.06.002

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JO - Journal of Empirical Finance

JF - Journal of Empirical Finance

ER -

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

Abstract

Keywords

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