Market Discipline in Commercial Banking: Evidence from the Market for Bank Equity
AbstractThis study presents empirical evidence of market discipline, using a panel dataset of listed banks on the Karachi Stock Exchange. We construct multiple riskbased measures from the stock prices between 2004 and 2009 to determine whether an increase in the risk profile results in an increase in compensation for depositors and other creditors. The risk variables used include market risk, value at risk, size and value premium, default likelihood indicator, price relatives, and a control variable representing gross domestic product growth. We find a significant relationship between our risk factors and cost of deposits, indicating that banks align deposit compensation with their risk perception. However, we cannot find a link between the market perception of risk and deposit switching. These findings have important implications for policymakers as market discipline could complement the state’s regulatory role and lower the cost of supervision. Our estimations of value at risk and the default likelihood indicator using stochastic simulations is a methodological contribution that could be used for effective risk management practices.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.
Volume (Year): 16 (2011)
Issue (Month): Special Edition (September)
Contact details of provider:
Postal: Intersection Main Boulevard Phase VI DHA and Burki Road, Lahore
Phone: (92-42) 6560939
Web page: http://www.lahoreschoolofeconomics.edu.pk/EconomicsJournal/LJEIntro.aspx
More information through EDIRC
Market Discipline; Karachi Stock Exchange; Value at Risk; Default Likelihood Indicator.;
Find related papers by JEL classification:
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Reint Gropp & Jukka Vesala & Giuseppe Vulpes, 2002.
"Equity and bond market signals as leading indicators of bank fragility,"
Conference Series ; [Proceedings],
Federal Reserve Bank of Boston.
- Gropp, Reint & Vesala, Jukka & Vulpes, Giuseppe, 2006. "Equity and Bond Market Signals as Leading Indicators of Bank Fragility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 399-428, March.
- Gropp, Reint & Vesala, Jukka & Vulpes, Giuseppe, 2002. "Equity and bond market signals as leading indicators of bank fragility," Working Paper Series 0150, European Central Bank.
- Breen, William J & Lerner, Eugene M, 1973. "Corporate Financial Strategies and Market Measures of Risk and Return," Journal of Finance, American Finance Association, vol. 28(2), pages 339-51, May.
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
- Shimizu, Katsutoshi, 2009. "Is the information produced in the stock market useful for depositors?," Finance Research Letters, Elsevier, vol. 6(1), pages 34-39, March.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
- Bongini, Paola & Laeven, Luc & Majnoni, Giovanni, 2002. "How good is the market at assessing bank fragility? A horse race between different indicators," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 1011-1028, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shahid Salahuddin).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.