Skip to main content
Article thumbnail
Location of Repository

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

By Kimie Harada, Takatoshi Ito and Shuhei Takahashi


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.

OAI identifier:

Suggested articles


  1. (1997). and Takatoshi Ito
  2. and Yuhang Xing (2004), “Default Risk in Equity Returns”,
  3. (2006). Bank Fragility in Japan: 1995-2003,” in Japan's Great Stagnation: Financial and Monetary Policy Lessons for Advanced Economies edited by Michael Hutchison and Frank Westermann, the
  4. (2007). Contagion Risk in the International Banking System and Implications for London as a Global Financial Center,”
  5. (2004). Credit Derivatives Premium as a New Japan Premium,"
  6. (2001). Determinants of the Japan Premium: Actions Speak Louder than Words,”
  7. (2008). Did Merger Help Japanese Mega-Banks Avoid Failure? Analysis of the Distance to Default of Banks,”
  8. (2007). Distance-to-Default in Banking:
  9. (2003). Does the Japanese Stock Market Price Bank-Risk? Evidence from Financial Firm Failures,”
  10. (2006). Economic Integration and Financial Stability: A European Perspective”, IMF Working Paper 05/296.
  11. (2000). Financial policy and Central Banking in Japan,
  12. (2004). Financial regulation in Japan: a sixth year review of the Financial Services Agency”,
  13. (2004). Financial Stability Report (Copenhagen). Available via the internet at Deposit Insurance Corporation of Japan, “Annual Report
  14. (2005). Financial Stability Review,
  15. (2008). Firm Fragility Measures and the Effect of Public Fund Injections
  16. (2005). Japan Premium and Stock Prices: Two Mirrors of Japanese Banking Crises,"
  17. (2006). Jukka Vesala and Giuseppe Vulpes
  18. Leandro Saita and Ke Wang (2007), “Multi-period Corporate Default Prediction with Stochastic Covariates,”
  19. (2006). Marco Lo Duca and Jukka Vesala
  20. (2003). Modeling Default Risk,” Moody’s KMV White Paper,
  21. (1974). On the Pricing of Corporate Debt:
  22. (2001). Takeo and Anil Kashyap
  23. (2004). The Evolution of Bank Resolution Policies in 25 Japan: Evidence from Market Equity Values,"
  24. (2003). The Impact of Japan’s Financial Stabilization Laws on Bank Equity Values,"
  25. (2000). The Japanese Financial System: An Introductory Overview,”
  26. (1973). The Pricing of Options and Corporate Liabilities,"
  27. (2000). The Stagnant Japanese Economy in the 1990s: The Need for Financial Supervision to Restore Sustained Growth,”
  28. (1999). Three Japan Premiums in Autumn

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.