Abstract

In this work we develop advanced techniques for measuring bank insolvency risk. More specically, we contribute to the existing body of research on the Z-Score. We develop bias reduction strategies for state-of-the-art Z-Score measures in the literature. We introduce novel estimators whose aim is to eectively capture nonstationary returns; for these estimators, as well as for existing ones in the literature, we discuss analytical condence regions. We exploit moment-based error measures to assess the eectiveness of these estimators. We carry out an extensive empirical study that contrasts state-of-the-art estimators to our novel ones on over ten thousand banks. Finally, we contrast results obtained by using Z-score estimators against business news on the banking sector obtained from Factiva. Our work has important implications for researchers and practitioners. First, accounting for nonstationarity in returns yields a more accurate quantication of the degree of solvency. Second, our measure allows re-searchers to factor in the degree of uncertainty in the estimation due to the availability of data.
Original languageEnglish
Pages (from-to)348-358
Number of pages11
JournalEuropean Journal of Operational Research
Volume260
Issue number1
Early online date10 Dec 2016
DOIs
Publication statusPublished - Jul 2017

Keywords

  • bank stability
  • prudential regulation
  • insolvency risk
  • nancial distress
  • Z-Score

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