Abstract

http://ssrn.com/abstract=1460526
 
 

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Is Hazard or Probit More Accurate in Predicting Financial Distress?
Evidence from U.S. Bank Failures


Rebel A. Cole


Driehaus College of Business at DePaul University

Qiongbing Wu


University of Western Sydney

August 1, 2010

22nd Australasian Finance and Banking Conference 2009

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.

Number of Pages in PDF File: 48

Keywords: bank, bank failure, failure prediction, financial crisis, forecasting, hazard model,

JEL Classification: G17, G21, G28

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Date posted: August 24, 2009 ; Last revised: August 14, 2010

Suggested Citation

Cole, Rebel A. and Wu, Qiongbing, Is Hazard or Probit More Accurate in Predicting Financial Distress? Evidence from U.S. Bank Failures (August 1, 2010). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: http://ssrn.com/abstract=1460526 or http://dx.doi.org/10.2139/ssrn.1460526

Contact Information

Rebel A. Cole
Driehaus College of Business at DePaul University ( email )
Chicago, IL 60604
United States
1-312-362-6887 (Phone)
HOME PAGE: http://condor.depaul.edu/~rcole
Qiongbing Wu (Contact Author)
University of Western Sydney ( email )
Locked Bag 1797
Penrith South DC, NSW 1797
Australia
+61-2-96859151 (Phone)
+61-2-96859105 (Fax)
HOME PAGE: http://www.uws.edu.au/economics_finance/sef/academic_profiles/doctor_qiongbing_linda_wu
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