A New Methodology for Estimating Internal Credit Risk and Bankruptcy Prediction under Basel II Regime

M. Naresh Kumar () and V. Sree Hari Rao ()

Computational Economics, 2015, vol. 46, issue 1, 83-102

Abstract: Credit risk estimation and bankruptcy prediction methods have utilized Altman’s Z-score method for the last several years. It is reported in many studies that Z-score is sensitive to changes in accounting figures. Researchers have proposed different variations to conventional Z-score that can improve the prediction accuracy. In this paper, we develop a new multivariate nonlinear model for computing the Z-score. In addition, we develop a new credit risk index by fitting a Pearson type 3 distribution to the transformed financial ratios. The results of our study have shown that the new Z-score can predict the bankruptcy with an accuracy of 98.6 % as compared to 93.5 % by Altman’s Z-score. Also, the discriminate analysis revealed that the new transformed financial ratios could predict the bankruptcy probability with an accuracy of 93.0 % as compared to 87.4 % using the weights of Altman’s Z-score. Copyright Springer Science+Business Media New York 2015

Keywords: Credit risk; Bankruptcy; Prediction; Pearson type 3 distribution; Z score; Non-linear models (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s10614-014-9452-9

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