Prague Economic Papers 2011, 20(2):157-176 | DOI: 10.18267/j.pep.394

The JT Index as an Indicator of Financial Stability of Corporate Sector

Petr Jakubík1, Petr Teplý2
1 European Central Bank, the Czech National Bank and the Institute of Economic Studies of Charles University in Prague, the Czech Republic (petr.jakubik@ecb.int).
2 EEIP a.s. and the Institute of Economic Studies of Charles University in Prague, the Czech Republic (teply@fsv.cuni.cz).

This paper presents the construction of a new indicator (named the JT index) evaluating the economy's financial stability, which is based on a financial scoring model estimated on Czech corporate accounting data. Seven financial indicators capable of explaining business failure at a 1-year prediction horizon are identified. Using the model estimated in this way, an aggregate indicator of the creditworthiness of the Czech corporate sector (the JT index) is then constructed and its evolution over time is shown. This indicator aids the estimation of the risks of this sector going forward and broadens the existing analytical set-up used by the Czech National Bank for its financial stability analyses. The results suggest that the creditworthiness of the Czech corporate sector steadily improved between 2004 and 2006. However, the JT index for 2007 and 2008 deteriorated what could be explained through global market turbulences while the further decrease in 2009 rather by the global recession. The used methodology for the construction of the JT index might be suitable for decision makers when evaluating the economy's financial stability. Although our research is done as a case study on the Czech Republic, its basic idea might be easily applied to other countries as well.

Keywords: financial stability, bankruptcy prediction, logit analysis, corporate sector risk, JT index
JEL classification: G28, G32, G33

Published: January 1, 2011  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Jakubík, P., & Teplý, P. (2011). The JT Index as an Indicator of Financial Stability of Corporate Sector. Prague Economic Papers, 20(2), 157-176. doi: 10.18267/j.pep.394
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Altman, E. I. (1968), "Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy." Journal of Finance, Vol. 23, No. 4, pp. 589-609. Go to original source...
    2. Altman, E. I., Haldeman, R.G. and Paul Narayanan, P. (1977), "ZETA Analysis: A New Model Identify Bankruptcy Risk of Corporations." Journal of Banking and Finance, Vol. 1, No. 1, pp. 29-54. Go to original source...
    3. Altman, E. I., Einsenbeis, R. A. (1978), "Financial Applications of Discriminant Analysis: A Clarification." Journal of Financial and Quantitative Analysis, Vol. 13, No. 1, pp. 185-195. Go to original source...
    4. Altman, E. I. (1996): "Corporate Bond and Commercial Loan Portfolio Analysis." The Wharton Financial Institutions Center, Wharton School, University of Pennsylvania, September 1996.
    5. Altman, E. I. (1993): Corporate Financial Distress and Bankruptcy: A Complete Guide to Predicting & Avoiding Distress and Profiting from Bankruptcy. 2nd Edition. New York: John Wiley & Sons.
    6. Altman, E. I. (2000): "Predicting Financial Distress of Companies: Revisiting the Z-score and ZETA Models." Stern School of Business, New York University.
    7. Baltagi, B. D. (2002): Econometrics. Heidelberg: Springer. Go to original source...
    8. Back, B., Laitinen, T., Sere, K., van Wezel, M. (1996), "Choosing Bankruptcy Predictors Using Discriminant Analysis, Logit Analysis, and Genetic Algorithms." TUCS Technical Report No. 40, September.
    9. Basel Committee on Banking Supervision (2006), International Convergence of Capital Measurement and Capital Standards: A Revised Comprehensive Framework. Bank for International Settlements.
    10. Beaver, W. (1966), "Financial Ratios as Predictors of Failure." Journal of Accounting Research, Vol. 4, Supplement, pp. 71-102. Go to original source...
    11. Berg, D. (2007), "Bankruptcy Prediction by Generalized Additive Models." Applied Stochastic Models in Business and Industry, Vol. 23, No. 2, pp. 129-143. Go to original source...
    12. Blaha, Z. S., Jindřichovská, I. (2006), Jak posoudit finanční zdraví firmy: finanční analýza pro investory: bankéře, brokery, manažery, podnikatele i drobné akcionáře. 3rd Ed. Praha: Management Press.
    13. Breiman, L., Friedmann, H. L., Olshen, R. A., Stone, C. J. (1983), Classification and Regression Trees. Monterey: Wadsworth & Brooks.
    14. Bunn, P., Redwood, V. (2003), "Company Accounts Based Modelling of Business Failures and the Implications for Financial Stability." Bank of England Working Paper No. 210. Go to original source...
    15. Chye K. H., Chin T., Peng G. (2005), "Credit Scoring Using Data Mining Techniques." Singapore Management Review, Vol. 26, No 2, pp. 25-46.
    16. CNB (2007), Financial Stability Report 2006. Czech National Bank.
    17. CNB (2008), Financial Stability Report 2007. Czech National Bank.
    18. CNB (2009), Financial Stability Report 2008/2009. Czech National Bank.
    19. CNB (2010), Financial Stability Report 2009/2010. Czech National Bank.
    20. Damodaran, A. (2002), Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. 2nd ed. New York: John Wiley & Sons.
    21. Deakin E. B. (1972), "A Discriminant Analysis of Predictors of Business Failure." Journal of Accounting Research, 10(1), pp.167-179. Go to original source...
    22. Dimitras, A. I., Zanakis, S. H., Zopounidis, C. (1996), "A Survey of Business Failures with an Emphasis on Prediction Methods and Industrial Applications." European Journal of Operational Research, Vol. 90, No. 5, pp. 487-513. Go to original source...
    23. Dimitras, A. I., Slowinski, R., Susmaga, R., Zopounidis, C. (1999), "Business Failure Prediction Using Rough Sets." European Journal of Operational Research, Vol. 114, No. 2, pp. 263-280. Go to original source...
    24. Durand, D. (1941), "Risk Elements in Consumer Instalment Financing." Working Paper, NBER.
    25. Edmister, R. O. (1972), "An Empirical Test of Financial Ratio Analysis for Small Business Failure Prediction." The Journal of Financial and Quantitative Analysis, 7(2), pp. 1477- 1493. Go to original source...
    26. Eisenbeis, R. A. (1977), "Pitfalls in the Application of Discriminant Analysis in Business and Economics." Journal of Finance, Vol. 32, pp. 875-900. Go to original source...
    27. Fisher, R. A. (1936), "The Use of Multiple Measurements in Taxonomic Problems." Annals of Eugenics, Vol. 7, pp. 179-188. Go to original source...
    28. Fitzpatrick, P. (1932), "A Comparison of Ratios of Successful Industrial Enterprises with Those of Failed Firms." Certified Public Accountant, October, November, and December 1932, pp. 598-605, 656-662 and 727-731.
    29. Hand, D., Henley, W. (1997), "Statistical Classification Methods in Consumer Credit Scoring: A Review." Journal of the Royal Statistical Society, Vol. 160, No. 3, pp. 523-541. Go to original source...
    30. Heckman, J., Ichimura, H., Todd, P. (1997), "Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Program." Review of Economic Studies, Vol. 64, No. 4, pp. 605-654. Go to original source...
    31. Hillegeist, S., Cram, D., Keating, E., Lundstedt, K. (2004), "Assessing the Probability of Bankruptcy." Review of Accounting Studies, 9(1), pp. 5-34. Go to original source...
    32. Jakubík, P. (2003), "Úloha skóringu při řízení kreditního rizika." Acta oeconomica Pragensia, Vol. 1, No. 1, pp. 147-158.
    33. Jakubík, P. (2007), "Macroeconomic Environment and Credit Risk." Czech Journal of Economics and Finance, Vol. 57, No. 1-2, pp. 60-78.
    34. Jakubík, P., Schmieder, Ch. (2008), "Stress Testing Credit Risk: Is the Czech Republic Different from Germany?" CNB Working Paper 9/2008.
    35. Jorion, P. (2007), Financial Risk Manager Handbook. New York: Wiley Finance.
    36. Joy, O. M., Tollefson, J. O. (1975), "On Financial Application of Discriminant Analysis." Journal of Financial and Quantitative Analysis, Vol. 10, No. 12, pp. 723-739. Go to original source...
    37. Kislingerová, E. (2007), Manažerské finance. 2nd ed. Praha: C. H. Beck.
    38. Klein, R., Spady, R. (1993): "An Efficient Semi-Parametric Estimator of the Binary Choice Model." Econometrica, Vol. 61, No. 2, pp.387-421. Go to original source...
    39. Kolari, J., Caputo, M., Wagner, D. (1996), "Trait Recognition: An Alternative Approach to Early Warnings Systems in Commercial Banking." Journal of Business Finance and Accounting, Vol. 10. No. 12, pp. 1415-34. Go to original source...
    40. Libby, R. (1975), "Accounting Ratios and the Prediction of Failure: Some Behavioral Evidence." Journal of Accounting Research, Vol. 13, No. 1, pp.150-161. Go to original source...
    41. Chi, L., Tang, T. (2006), "Bankruptcy Prediction: Application of Logit Analysis in Export Credit Risks." Australian Journal of Management, Vol. 31, No. 1. Go to original source...
    42. Martin, D. (1977), "Early Warning of Bank Failure: A Logit Regression Approach." Journal of Banking and Finance, Vol. 1, No. 6, pp. 249-276. Go to original source...
    43. Mays, E. (2001): Handbook of Credit Scoring, Chicago: Glenlake Publishing Company, Ltd.
    44. McKinsey et al. (2005), Valuation - Measuring and Managing the Value of Companies. 4th ed. New York: John Wiley & Sons.
    45. Mejstřík, M., Pečená, M., Teplý, P. (2008), Basic Principles of Banking. Prague: Karolinum Press.
    46. Ohlson, J. (1980), "Financial Ratios and the Probabilistic Prediction of Bankruptcy." Journal of Accounting Research, Vol. 18, No. 1, pp. 109-131. Go to original source...
    47. Rosenberg, E., Gleit, A. (1994), "Quantitative Methods in Credit Management: A Survey." Operations Research, Vol. 42, No. 4, pp. 589-613. Go to original source...
    48. Santomero, A., Vinso J. D. (1977), "Estimating the Probability of Failure for Commercial Banks and the Banking System." Journal of Banking and Finance, Vol 2, No. 1, pp. 185-205. Go to original source...
    49. Sironi, A., Resti, A. (2007), Risk Management and Shareholders' Value in Banking. 1st Ed. New York: John Wiley & Sons.
    50. Smith, R. F., Winakor, A. H. (1935), Changes in the Financial Structure of Unsuccessful Corporations. University of Illinois: Bureau of Business Research.
    51. Sorge, M., Virolainen, K. (2006), "A Comparative Analysis of Macro Stress-Testing Methodologies with Application to Finland." Journal of Financial Stability, Vol. 2, No. 2, pp. 113-151. Go to original source...
    52. Teplý, P. (2002), "Credit Risk Management in the Czech Banking Industry." Master Thesis, Institute of Economic Studies, Faculty of Social Science, Charles University in Prague, CR.
    53. Teplý, P., Diviš, K., Černohorská (2007), "Implications of the New Basel Capital Accord for European Banks." E+M Journal, Vol. 7, No. 1, pp. 58-64.
    54. Teplý, P. (2010), The Truth about the 2008-2009 Crisis: A Hard Lesson for the Global Markets. Saarbrücken: VDM Verlag.
    55. Teplý, P., Chalupka, R., Černohorský, J. (2010), "Operational Risk And Economic Capital Modeling." In proceedings of International Conference on Business, Economics and Tourism Management. World Academic Press, pp. 70-75.
    56. Thomas, L. C., Edelman, D. B., Crook, J. N. (2002), Credit Scoring & Its Applications. 1st Edition. Society for Industrial Mathematics. Go to original source...
    57. Virolainen, K. (2004), "Macro Stress Testing with a Macroeconomic Credit Risk Model for Finland." Discussion Paper No. 18, Helsinki, Bank of Finland. Go to original source...
    58. Wezel, T. (2005), Determinants of Foreign Direct Investment in Emerging Markets: An Empirical Study of FDI Flows from Germany and its Banking Sector. Frankfurt am Main: Peter Lang GmbH.
    59. Wiginton, (1980), "A Note on the Comparison of Logit and Discriminant Models of Consumer Credit Behavior." Journal of Finance and Quantitative Analysis, Vol. 15, pp. 757-776. Go to original source...
    60. Wilcox, J. W. (1971), "A Simple Theory of Financial Ratios as Predictors of Failures." Journal of Accounting Research, Vol. 9, No.2, pp. 389-395. Go to original source...
    61. Wilson, T. C. (2004a), "Portfolio Credit Risk (I)." in Shimko, D., ed., Credit Risk Models and Management, 2nd ed. Pamplona: Risk Books.
    62. Wilson, T. C. (2004b), "Portfolio Credit Risk (II)." in Shimko, D., ed., Credit Risk Models and Management. 2nd Ed. Pamplona: Risk Books.
    63. Zhang, G., Hu, M. Y., Patuwo, B. E. (1999), "Artificial Neural Networks in Bankruptcy Prediction: General Framework and Cross-Validation Analysis." European Journal of Operational Research, Vol. 116, pp. 16-32. Go to original source...
    64. Zmijewski, M. (1984), "Methodological Issues Related to the Estimation of Financial Distress Prediction Models." Journal of Accounting Research, Vol. 22, Supplement, pp. 59-82. Go to original source...

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content