Bank insolvency risk and Z-score measures: A refinement

Research output: Contribution to journalArticlepeer-review

Authors

Colleges, School and Institutes

Abstract

We re-examine the probabilistic foundation of the link between Z-score measures and banks’ probability of insolvency, offering an improved measure of that probability without imposing further distributional assumptions. While the traditional measure of the probability of insolvency thus provides a less effective upper bound of the probability of insolvency, it can be meaningfully reinterpreted as a measure capturing the odds of insolvency instead. We similarly obtain refined probabilistic interpretations of the commonly used simple and log-transformed Z-score measures; in particular, the log of the Z-score is shown to be negatively proportional to the log odds of insolvency.

Details

Original languageEnglish
JournalFinance Research Letters
Early online date10 Jan 2015
Publication statusPublished - Jan 2015

Keywords

  • Insolvency risk, Z-score, Probability, Odds