The role of downward assets volatility in assessing the book-value distance to default

Paolo Coccorese and Laura Santucci

Journal of Financial Economic Policy, 2019, vol. 11, issue 4, 485-504

Abstract: Purpose - The purpose of this paper is to test the different definitions of “book-value distance to default” (BVDD) to assess whether using downward assets volatility provides some advantage to the index performance or produces adverse impacts on its effectiveness. Design/methodology/approach - Our BVDD is a modification of the Merton’s “distance to default” and relies on accounting data only. A survival analysis is conducted by estimating a Cox semiparametric hazard model where the BVDD is built as a function of a parameterθ, which indicates the percentage of upward assets volatility incorporated in its calculation so as to compare its success in predicting banks’ distress over different levels ofθ. The investigation is performed on panel data regarding 866 Italian banks over 21 years. Findings - Results show that while the “pure” downward assets volatility does not catch all the nuances of risk, a small portion of upward deviation allows to notably increase the probability of identifying a distressed bank beforehand. Originality/value - This study adds to the literature by providing two main contributions. First, it confirms that the BVDD is a reliable measure, being able to predict whether a bank is going to face distress. To the best of the authors’ knowledge, this is the first attempt to appraise BVDD’s accuracy as an index for banks’ soundness through a rigorous econometric experiment. Second, some important insights regarding the Italian banking system may be inferred: larger well-capitalized banks seem to be less likely to fail, whereas credit institutions with higher loans-to-assets ratios are found to be riskier.

Keywords: Bankruptcy; Banks; Financial risk and risk management; G21; G32; G33 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-10-2018-0145

DOI: 10.1108/JFEP-10-2018-0145

Access Statistics for this article

Journal of Financial Economic Policy is currently edited by Prof Franklin Mixon

More articles in Journal of Financial Economic Policy from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().