This paper assesses the classification performance of the Z‐Score model in predicting bankruptcy and other types of firm distress, with the goal of examining the model's usefulness for all parties, ...especially banks that operate internationally and need to assess the failure risk of firms. We analyze the performance of the Z‐Score model for firms from 31 European and three non‐European countries using different modifications of the original model. This study is the first to offer such a comprehensive international analysis. Except for the United States and China, the firms in the sample are primarily private, and include non‐financial companies across all industrial sectors. We use the original Z′′‐Score model developed by Altman, Corporate Financial Distress: A Complete Guide to Predicting, Avoiding, and Dealing with Bankruptcy (1983) for private and public manufacturing and non‐manufacturing firms. While there is some evidence that Z‐Score models of bankruptcy prediction have been outperformed by competing market‐based or hazard models, in other studies, Z‐Score models perform very well. Without a comprehensive international comparison, however, the results of competing models are difficult to generalize. This study offers evidence that the general Z‐Score model works reasonably well for most countries (the prediction accuracy is approximately 0.75) and classification accuracy can be improved further (above 0.90) by using country‐specific estimation that incorporates additional variables.
We examine how generations X, Y, and Z might react to market-moving events over short- and long-term horizons to maintain an optimal balance among risk, return, and investor preferences. To analyze ...various portfolio variants, we use data on selected global assets and several types of economic and non-economic events for 2000-2021H1, applying the mean-variance optimization procedure. According to our results, in optimal portfolios, fixed-income assets dominate and are the main driver of portfolio adjustments. Portfolios with short-term horizons with less risk-averse investors and those for generation Z are the most reactive to analyzed types of events. None of the events
creates an extraordinary opportunity to increase returns. However, expansionary monetary policy generates the greatest potential for incremental returns. Our findings provide practical implications for investors on how to adjust their portfolios in response to significant market events.
In this study, we analyze the probability of bank failure, the expected losses, and the costs of bank restructuring with the application of a lognormal distribution probability function for three ...categories of European banks, that is, small, medium, and large, over the post-crisis period from 2012 to 2016. Our goal was to determine whether the total capital ratio (TCR) properly reflects banks’ solvency under stress conditions. We identified a phenomenon that one can call the “crooked smile of TCR”. Medium-sized banks with relatively high TCRs performed poorly in stress tests; however, the probability of bank failure increases slightly with the size of the bank, while the TCR decreases. We claim that the focus on capital adequacy measures is not sufficient to achieve the goal of improving banks’ stability and reducing their restructuring costs. Our results are of special importance for medium-sized banks, as these banks are not regularly subjected to publicly available stress tests.
The purpose of this study is to evaluate the safety of individuals’ behaviour in the cyber world, especially when using financial services. The article focuses on knowledge of cybersecurity issues, ...cyber risk awareness and respondents’ self-assessment as potential determinants of individual behaviour. The data obtained from a survey of a representative group of Polish citizens during the second wave of the COVID-19 pandemic was analysed. Ordinal logistic regression and instrumental variable analysis confirm the existence of a positive relationship between knowledge and awareness of cyber risk and safe behaviour in the cyber world. Older generations exhibit safer behaviour which may be linked to their life experience; however, the results do not confirm that experiencing a loss due to cyber risk convinces individuals to use Internet-based solutions in a safer manner. Therefore, educational campaigns should be expanded to include cyber risk issues and tailored to the needs of various users.
This study evaluates the scope and consequences of the application of new technologies (NTs) within the Polish banking and insurance sectors and thus contributes to the knowledge of CEE financial ...market development. The goal is to understand the implementation of particular NTs in two different sectors and identify the motivations, strategies, phases of realisation and cost efficiency depending on the institution’s size. The detail of the study requires the use of qualitative research methods. In-depth interviews are employed to figure out the criteria based on which decisions to implement NTs are made. The findings indicate that the primary objective of NT implementation is to respond to customers’ needs, followed by cost-cutting and achieving more efficient internal processes. The application of artificial intelligence (AI) and machine learning (ML) in risk management areas is still a work in progress. In the next five years cloud computing is expected to become the most important NT and thus will have to meet numerous regulatory requirements.
In this study we focus on distress events of European banks over the period of 1990–2015, using unbalanced panel of 3,691 banks. We identify 132 distress events, which include actual bankruptcies as ...well as bailout cases. We apply CAMEL‑like bank‑level variables and control macroeconomic variables (GDP, inflation, unemployment rate). The analysis is based on traditional logistic regression and k‑means clustering. We find, that the probability of distress is connected with macroeconomic conditions via regional grouping (clustering). Bank‑level variables that were stable predictors of distress from 1 to 4 years prior to event are equity to total assets ratio (leverage) and loans to funding (liquidity).From macroeconomic factors, the GDP growth is a reasonable variable, however with differentiated impact: for 1 year distance high distress probability is connected with low GDP growth, but for 2, 3 and 4 year distance: high distress probability is conversely connected with high GDP growth.This shows the changing role of macroeconomic environment and indicates the potential impact of favorable macroeconomic conditions on building‑up systemic problems in the banking sector.
•We model the interest rate impact on systemic risk for a wide range of countries.•A negative interest rate policy amplifies contagion within the banks’ network.•NIRP per se is not a source of ...systemic risk but adds to its existing level.•NIRPs show considerable heterogeneity across countries.•The greatest relevance of negative rates is identified for the Eurozone.
This study evaluates the impact of a negative interest rate policy (NIRP) on systemic risk, covering a wide range of economies over a relatively long term. Monetary policy affects banks’ vulnerability to systemic risk events and the likelihood of triggering such events, particularly among institutions connected via the contagion network. With a rising magnitude of interest rate shocks, the effect on systemic risk becomes non-linear, being driven more by contagion, especially under NIRP. The uniqueness of the impact of NIRP may be characterized as arising from the evolution of the structure and intensity of impulse transmission while leaving the structure of the monetary policy transmission mechanism unaffected.
This study aims to investigate the impact of a wide range of economic and non-economic events on stock market spillover effects in a group of 16 major developed and emerging countries over the ...2000–2020 period. We analyse the size and structure of contagion to verify how different events spread contagion across borders and sectors. We applied the methodology proposed by Diebold and Yilmaz (2009, 2012, 2014) to a wide range of stock market indices using a quantile regression framework. Our findings show that the sectoral and country-specific indices usually range below the overall market contagion levels, while their density functions differ structurally from those of overall market contagion. Among non-economic events, viruses – notably, the COVID-19 pandemic – are the most widespread sources of contagion, while terrorism events affect the widest range of sectors with the greatest magnitude. Among economic events, the strongest negative impact is found for prudential ones. Quantitative easing (QE) and liquidity support reduce overall market contagion, while QE unwinding has a more substantial role than its introduction or expansion, exemplifying its asymmetric impact. We also investigate how investors may benefit from using contagion information in developing trading strategies, highlighting the positive impact of spillover-based weightings on portfolio returns.
•Various economic and non-economic events cause stock market spillover effects.•Viruses (e.g., the COVID-19 pandemic) are the most widespread source of market contagion.•Terrorism events affect the widest range of sectors with the greatest magnitude.•Quantitative easing has an asymmetric impact on overall market contagion.•Investors may benefit from implementing spillover-based information in their portfolio decisions.
A Race for Long Horizon Bankruptcy Prediction Altman, Edward I.; Iwanicz-Drozdowska, Małgorzata; Laitinen, Erkki K. ...
Applied economics,
08/2020, Volume:
52, Issue:
37
Journal Article
Peer reviewed
Open access
This study compares the accuracy and efficiency of five different estimation methods for predicting financial distress of small and medium-sized enterprises. We apply different methods for a large ...set of financial and non-financial variables, using filter and wrapper selection, to predict bankruptcy up to 10 years before the event in an open, European economy. Our findings show that logistic regression and neural networks are superior to other approaches. We document how the cost-return ratio considerably affects the location of optimal cut-off points and attainable profit in credit decisions. Once a loan provider selects a particular prediction model, an effort should be made to find the optimal cut-off score to maximize the efficiency of the technique. Indeed, this often involves determining several cut-off levels where the portfolio of products and services exhibits different cost-return characteristics.
PurposeThe parent-subsidiary nexus has been explored since the mid-1990s, but the extent to which subsidiaries resemble their parents remains unclear. Therefore, this study examines the performance ...drivers for subsidiary banks in emerging markets and their parents to determine the similarities between these groups. The findings could help identify key financial performance measures that should be included in global strategies for multinational banks operating in emerging markets.Design/methodology/approachThe study uses data on subsidiaries from 32 countries, including 20 European transitioning countries and 49 parent companies operating internationally from 1996 to 2015. It considers several models that distinguish between units using individual bank effects and the stochastic structure. In a robustness analysis, EU- and non-EU-based institutions are distinguished and long-term historical links between parents' and subsidiaries' countries are considered.FindingsCost control, capital adequacy and asset quality policies have similar importance for parent banks and subsidiaries and are strictly coordinated, whereas the remaining policies allow more flexibility. Subsidiaries in the EU and in countries that were politically and/or militarily influenced by parent countries do not “fall far from the tree”, which signals their strong group-wide integration and coordination.Research limitations/implicationsThis study covers a limited number of emerging market countries due to the limited availability of long-term series data. Future studies should include more countries.Originality/valueThis study identifies key financial measures used on a group-wide basis for performance management while accounting for long-term relations between host and home countries and the geopolitical characteristics of host countries.
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