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

17 Pages Posted: 5 Jan 2017 Last revised: 6 Jan 2022

See all articles by Vincent Bouvatier

Vincent Bouvatier

University Paris-Est Créteil (UPEC) - ERUDITE

Laetitia Lepetit

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE)

Pierre-Nicholas Rehault

Université de Limoges, LAPE

Frank Strobel

University of Birmingham - Department of Economics

Date Written: January 5, 2022

Abstract

We evaluate several alternative approaches to the construction of time-varying Z-scores as bank insolvency risk measures. Focusing on US and European banks during the financial crisis of 2007-2008, we carry out comparisons of 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.

Keywords: Z-score; bank; insolvency risk; risk measure

JEL Classification: G21, G28

Suggested Citation

Bouvatier, Vincent and Lepetit, Laetitia and Rehault, Pierre-Nicholas and Strobel, Frank, Time-varying Z-score measures for bank insolvency risk: best practice (January 5, 2022). Available at SSRN: https://ssrn.com/abstract=2892672 or http://dx.doi.org/10.2139/ssrn.2892672

Vincent Bouvatier

University Paris-Est Créteil (UPEC) - ERUDITE ( email )

Mail des Mèches
61 avenue du Général de Gaulle
Créteil Cedex, 94010
France

Laetitia Lepetit

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE) ( email )

5 rue Felix Eboue
BP 3127
Limoges Cedex 1, 87031
France
+33555149213 (Phone)

HOME PAGE: http://www.unilim.fr/lape/

Pierre-Nicholas Rehault

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Frank Strobel (Contact Author)

University of Birmingham - Department of Economics ( email )

Economics Department
Birmingham, B15 2TT
United Kingdom

HOME PAGE: http://www.economics.bham.ac.uk

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