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Inefficiency and Bank Failures: A Joint Bayesian Estimationof a Stochastic Frontier Model and a Hazards Model

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  • Jim Sánchez González
  • Diego Restrepo Tobón
  • Andrés Ramírez Hassan

Abstract

In modeling bank failure, estimating inefficiency separately from the hazards modelresults in inefficient, biased, and inconsistent estimators. We develop a method to si-multaneously estimate a stochastic frontier model and a hazards model using Bayesiantechniques. This method overcomes issues related to two-stage estimation methods,allows for computing the marginal effects of the inefficiency over the probability offailure, and facilitates statistical inference of the functions of the parameters such aselasticities, returns to scale, and individual inefficiencies. Simulation exercises showthat our proposed method performs better than two-stage maximum likelihood, spe-cially in small samples. In addition we find that inefficiency plays a statistically and economically significant role in determining the time to failure of U.S. commercial banks during 2001 to 2010.

Suggested Citation

  • Jim Sánchez González & Diego Restrepo Tobón & Andrés Ramírez Hassan, 2018. "Inefficiency and Bank Failures: A Joint Bayesian Estimationof a Stochastic Frontier Model and a Hazards Model," Documentos de Trabajo de Valor Público 16788, Universidad EAFIT.
    • Handle: RePEc:col:000122:016788
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    References listed on IDEAS

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    1. Wheelock, David C & Wilson, Paul W, 1995. "Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 689-700, November.
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    5. Kumbhakar,Subal C. & Wang,Hung-Jen & Horncastle,Alan P., 2015. "A Practitioner's Guide to Stochastic Frontier Analysis Using Stata," Cambridge Books, Cambridge University Press, number 9781107609464.
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    More about this item

    Keywords

    Technical Inefficiency; Proportional Hazards Model; Bank Failures;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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