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

M. Naresh Kumar and V. Sree Hari Rao

Papers from arXiv.org

Abstract: Credit estimation and bankruptcy prediction methods have been utilizing 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. Researches have proposed different variations to conventional $z$ score that can improve the prediction accuracy. In this paper we develop a new multivariate non-linear model for computing the $z$ score. In addition we develop a new credit risk index by fitting a Pearson type-III distribution to the transformed financial ratios. The results from 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 the 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.

Date: 2015-02
New Economics Papers: this item is included in nep-acc, nep-ban and nep-rmg
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Citations: View citations in EconPapers (4)

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