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Is the Distance to Default a Good Measure in Predicting Bank Failures? Case Studies

Kimie Harada, Takatoshi Ito () and Shuhei Takahashi

No 16182, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the movements of the Distance to Default (DD), a market-based measure of corporate default risk, of eight failed Japanese banks in order to evaluate the predictive power of the DD measure for bank failures. The DD became smaller in anticipation of failure in many cases. The DD spread, defined as the DD of a failed bank minus the DD of sound banks, was also a useful indicator for deterioration of a failed bank's health. For some banks, neither the DD nor the DD spread predicted the failures. However, those results were partly due to lack of transparency in financial statements and disclosed information.

JEL-codes: G19 G21 (search for similar items in EconPapers)
Date: 2010-07
Note: IFM ME
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Published as "Is the Distance to Default a Good Measure in Predicting Bank Failures? A case Study of Japanese Major Banks", (with Takatoshi Ito and Shuhei Takahashi ), Japan and the World Economy, 2013, vol. 27.

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