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 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.
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.
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.
The global financial crisis (GFC) has shown that monetary policy focused on a stable price level may negatively affect the stability of the financial system. Therefore, achieving price and financial ...stability using interest rates as the main tool is difficult. In this paper, we analyse how often monetary policy strengthened imbalances in the financial system in 20 countries from 1999Q1 to 2020Q2. To this end, we compare monetary policy stance with a novel financial imbalance index (FII). We find that monetary policy is material in aggravating financial imbalances mostly in Eurozone countries. We attribute this finding to the ECB’s “
” monetary policy and to difficulties with applying single monetary policies in countries with different economic conditions and in different phases of credit and financial cycles. Our results point to a need for a proactive macroprudential policy in the environment of low interest rates.
Post-global financial crisis (GFC) regulatory overhauls – where uniform solutions were adopted for various types of banks – have significantly changed the environment in which banks operate. This is ...especially visible in the European banking industry, whose profitability has not recovered to pre-GFC levels. Therefore, our goal is to investigate whether the determinants of bank profitability fit these uniform solutions. Accordingly, we explore the profitability of European banks in various settings from 2012 to 2016, which is the period marked by tough reforms. Since a decrease in profit may be treated as a sign of financial difficulties, we model static (i.e., loss) and dynamized (i.e., loss, moderate and severe decreases in profits) indicators of bank situations based on a sample of approximately 6700 bank-year observations. Different patterns of the determinants of profit decreases are found among different types and sizes of banks. Moreover, the determinants of loss events apparently differ from those accounting for profit decreases. These findings underline that a “one-size-fits-all” approach to regulation and supervision is not adequate for market realities.
We investigate how the presence of local banks affects the prospects of troubled small and medium-sized enterprises (SMEs). Using a new dataset covering the years 2006–2015, we find evidence ...supporting the notion that local banks extend a helping hand to SMEs and act in this role efficiently. We establish that SMEs operating in regions where local banks hold a relatively strong position suffer losses less frequently, accumulate lower losses in relation to equity capital, report shorter series of losses, have a lower probability of legal bankruptcy or serious financial distress, and recover more easily from financial difficulties. Therefore, our study suggests that policies shaping the local structures of banking markets have a material impact on distressed SMEs' prospects.
•We study the impact of local banks on the prospects of troubled SMEs.•We use a new dataset from Poland covering the years 2006–2015.•We find that local banks extend a helping hand to SMEs.•We establish that local banks assist troubled SMEs efficiently.
PDF
