Bank insolvency risk and Z-score measures: A refinement

Laetitia Lepetit and Frank Strobel

Finance Research Letters, 2015, vol. 13, issue C, 214-224

Abstract: We re-examine the probabilistic foundation of the link between Z-score measures and banks’ probability of insolvency, offering an improved measure of that probability without imposing further distributional assumptions. While the traditional measure of the probability of insolvency thus provides a less effective upper bound of the probability of insolvency, it can be meaningfully reinterpreted as a measure capturing the odds of insolvency instead. We similarly obtain refined probabilistic interpretations of the commonly used simple and log-transformed Z-score measures; in particular, the log of the Z-score is shown to be negatively proportional to the log odds of insolvency.

Keywords: Insolvency risk; Z-score; Probability; Odds (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G33 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (98)

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Working Paper: Bank Insolvency Risk and Z-Score Measures: A Refinement (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:13:y:2015:i:c:p:214-224

DOI: 10.1016/j.frl.2015.01.001

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