Endogenous bank risk and efficiency

Delis, Manthos D. and Iosifidi, Maria and Tsionas, Efthymios (2017) Endogenous bank risk and efficiency. European Journal of Operational Research, 260 (1). pp. 376-387. ISSN 0377-2217

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We develop a framework to incorporate bank risk, as measured from the variance of profits or returns, within a model of frontier efficiency. Our framework follows the premise that risk is endogenously related to efficiency. We estimate our model using panel data for U.S. banks and Bayesian techniques. We show that excluding risk from the efficiency model significantly biases the efficiency estimates and the ranking of banks according to their competitive advantage. We also demonstrate that there is a negative risk-efficiency nexus with causality running both ways, while our estimates of risk are fully consistent with the developments in the banking industry over the period 1976-2014.

Item Type:
Journal Article
Journal or Publication Title:
European Journal of Operational Research
Additional Information:
This is the author’s version of a work that was accepted for publication in European Journal of Operational Research. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Journal of Operational Research, 260, 1, 2017 DOI: 10.1016/j.ejor.2016.12.024
Uncontrolled Keywords:
?? or in bankingstochastic frontierendogenous riskrisk-efficiency relationshipbayesian methodsmodelling and simulationmanagement science and operations researchinformation systems and management ??
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Deposited On:
20 Dec 2016 09:08
Last Modified:
21 Mar 2024 00:42