NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Kimie Harada, Takatoshi Ito, Shuhei Takahashi

NBER Working Paper No. 16182
Issued in July 2010
NBER Program(s):   IFM   ME

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.

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Document Object Identifier (DOI): 10.3386/w16182

Published: "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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