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

Abstract

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.