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

Vincent Bouvatier, Laetitia Lepetit, Pierre-Nicolas Rehault and Frank Strobel

Journal of Empirical Finance, 2023, vol. 73, issue C, 170-179

Abstract: We evaluate several alternative approaches to constructing time-varying Z-scores as bank insolvency risk measures. Focusing on US and European banks during the financial crisis of 2007–2008, we compare 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 (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:73:y:2023:i:c:p:170-179

DOI: 10.1016/j.jempfin.2023.06.002

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