How Predictable Were the Bank Failures of 2008?

31 Pages Posted: 20 Mar 2009

See all articles by Jeremy Berkowitz

Jeremy Berkowitz

University of Houston - Department of Finance

Praveen Kumar

University of Houston - Department of Finance

Nisan Langberg

University of Houston - C.T. Bauer College of Business; Tel Aviv University - Coller School of Management

Date Written: March 18, 2009

Abstract

We examine the time series behavior of the stock prices and bond yields of a set of large banks and financial institutions that failed or were taken over in distress in 2008. We find evidence that both the risk-neutral probability of default implied by bond yields and the steady decline in stock prices preceded the eventual defaults by several quarters. Our results are consistent with the model of Berkowitz, Kumar and Langberg (2009) and support the view that statistical warning signs may have been available to regulators with a substantial lead time.

Keywords: bank failure, predictability, default probability, financial crisis

JEL Classification: G21, G17, G33

Suggested Citation

Berkowitz, Jeremy and Kumar, Praveen and Langberg, Nisan, How Predictable Were the Bank Failures of 2008? (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=1364200 or http://dx.doi.org/10.2139/ssrn.1364200

Jeremy Berkowitz (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

Praveen Kumar

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Nisan Langberg

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

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