How accurately can Z-score predict bank failure?

Chiaramonte, L., Liu, (F.) H., Poli, F. and Zhou, M. (2016) How accurately can Z-score predict bank failure? Financial Markets, Institutions and Instruments, 25(5), pp. 333-360. (doi:10.1111/fmii.12077)

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Abstract

Bank risk is not directly observable, so empirical research relies on indirect measures. We evaluate how well Z-score, the widely used accounting-based measure of bank distance to default, can predict bank failure. Using the U.S. commercial banks’ data from 2004 to 2012, we find that on average, Z-score can predict 76% of bank failure, and additional set of other bank- and macro-level variables do not increase this predictability level. We also find that the prediction power of Z-score to predict bank default remains stable within the three-year forward window.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Liu, Dr Hong
Authors: Chiaramonte, L., Liu, (F.) H., Poli, F., and Zhou, M.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Financial Markets, Institutions and Instruments
Publisher:Wiley
ISSN:0963-8008
ISSN (Online):1468-0416
Published Online:14 November 2016
Copyright Holders:Copyright © 2016 Wiley
First Published:First published in Financial Markets, Institutions & Instruments 25(5):333-360
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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