*Daniel A. Nuxoll is Senior Economist, John O'Keefe is Chief of the Financial Risk Measurement Section, and Katherine Samolyk is Senior Financial Economist in the Division of Insurance and Research, Federal Deposit Insurance Corporation. The views expressed here are those of the authors and not necessarily those of the Federal Deposit Insurance Corporation or its staff.
11Thus, for each bank size class and each sample period, we estimate the following models:
(1) (bank model)
(2) (banking & economic model)
(3) (na´ve model)
where j = jth bank size class (1-6).
i = ith observation in size class j.
k = kth right-hand-side banking variable.
l = lth right-hand-side economic variable.
In sample, the RMSE of the na´ve model regressions will be very close to the standard deviation of the dependant variable for each sample of banks. Out of sample, the RMSE of the na´ve model forecasts can differ from the standard deviation of realized asset-quality changes because the forecasts are based on the average changes in nonperforming-asset ratios evident historically, and these average changes can differ from the realized mean.