Is the Distance to Default a Good Measure in Predicting Bank Failures? Case Studies
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.
We are also grateful for helpful discussions with Ryuzo Miyao, Kiyotaka Nakashima and Toshiyuki Souma and for insigutful comments from participants in Japanese Economic Association in 2008. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
"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.