IDEAS home Printed from https://ideas.repec.org/p/erg/wpaper/679.html
   My bibliography  Save this paper

Stock Market Assessment of Bank Risk: Evidence from the Maghreb Region

Author

Listed:
  • Lassaâd Mbarek

    (Central Bank of Tunisia)

  • Dorra Mezzez Hmaied

Abstract

This paper examines the ability of stock market investors to monitor bank risk for a sample of listed banks in Tunisia and Morocco over the period 2003-2009. We construct various market-based risk measures derived from the market model as well as the distance-to-default derived from the structural model of credit risk. Using a panel data analysis, we show that market-based measures of risk are strongly associated to bank fundamental characteristics, especially capital and size. This finding has important implications for regulators as shareholders are able to assess a bank’s financial condition and hence exert effective discipline on the bank’s risk-taking behavior.

Suggested Citation

  • Lassaâd Mbarek & Dorra Mezzez Hmaied, 2012. "Stock Market Assessment of Bank Risk: Evidence from the Maghreb Region," Working Papers 679, Economic Research Forum, revised 2012.
    • Handle: RePEc:erg:wpaper:679
    as

    Download full text from publisher

    File URL: http://erf.org.eg/wp-content/uploads/2014/08/679.pdf
    Download Restriction: no
    File URL: http://bit.ly/2lwVe0q
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sironi, Andrea, 2003. "Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 443-472, June.
    2. Reint Gropp & Jukka Vesala, 2004. "Deposit Insurance, Moral Hazard and Market Monitoring," Review of Finance, European Finance Association, vol. 8(4), pages 571-602.
    3. Berger, Allen N & Davies, Sally M & Flannery, Mark J, 2000. "Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 641-667, August.
    4. John R. Hall & Thomas B. King & Andrew P. Meyer & Mark D. Vaughan, 2002. "What can bank supervisors learn from equity markets? a comparison of the factors affecting market-based risk measures and BOPEC scores," Supervisory Policy Analysis Working Papers 2002-06, Federal Reserve Bank of St. Louis.
    5. Penas, Maria Fabiana & Unal, Haluk, 2004. "Gains in bank mergers: Evidence from the bond markets," Journal of Financial Economics, Elsevier, vol. 74(1), pages 149-179, October.
    6. 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.
    7. Armen Hovakimian & Edward J. Kane, 2000. "Effectiveness of Capital Regulation at U.S. Commercial Banks, 1985 to 1994," Journal of Finance, American Finance Association, vol. 55(1), pages 451-468, February.
    8. Flannery, Mark J & Sorescu, Sorin M, 1996. "Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983-1991," Journal of Finance, American Finance Association, vol. 51(4), pages 1347-1377, September.
    9. Herring, Richard J., 2004. "The subordinated debt alternative to Basel II," Journal of Financial Stability, Elsevier, vol. 1(2), pages 137-155, December.
    10. Galloway, Tina M. & Lee, Winson B. & Roden, Dianne M., 1997. "Banks' changing incentives and opportunities for risk taking," Journal of Banking & Finance, Elsevier, vol. 21(4), pages 509-527, April.
    11. Gennotte, Gerard & Pyle, David, 1991. "Capital controls and bank risk," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 805-824, September.
    12. Saunders, Anthony & Strock, Elizabeth & Travlos, Nickolaos G, 1990. "Ownership Structure, Deregulation, and Bank Risk Taking," Journal of Finance, American Finance Association, vol. 45(2), pages 643-654, June.
    13. Elijah Brewer & Cheng-Few Lee, 1986. "How the market judges bank risk," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 10(Nov), pages 25-31.
    14. Semih Yildirim & George C. Philippatos, 2003. "Competition And Contestability In Central And Eastern European Banking Markets," Finance 0310004, University Library of Munich, Germany.
    15. Mr. Tigran Poghosyan & Mr. Martin Cihak, 2009. "Distress in European Banks: An Analysis Basedon a New Dataset," IMF Working Papers 2009/009, International Monetary Fund.
    16. John D. Wagster, 1996. "Impact of the 1988 Basel Accord on international banks," Proceedings 497, Federal Reserve Bank of Chicago.
    17. 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 449-470, May.
    18. Konishi, Masaru & Yasuda, Yukihiro, 2004. "Factors affecting bank risk taking: Evidence from Japan," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 215-232, January.
    19. Koehn, Michael & Santomero, Anthony M, 1980. "Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-1244, December.
    20. DeYoung, Robert & Roland, Karin P., 2001. "Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 54-84, January.
    21. Flannery, Mark J, 1998. "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 273-305, August.
    22. Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, vol. 44(1), pages 1-34, January.
    23. Blum, Jurg, 1999. "Do capital adequacy requirements reduce risks in banking?," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 755-771, May.
    24. Jeffery W. Gunther & Mark E. Levonian & Robert R. Moore, 2001. "Can the stock market tell bank supervisors anything they don't already know?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 2-9.
    25. Krainer, John & Lopez, Jose A, 2004. "Incorporating Equity Market Information into Supervisory Monitoring Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 1043-1067, December.
    26. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
    27. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
    28. Deniz Igan & Marcelo Pinheiro, 2010. "Exposure to Real Estate in Bank Portfolios," Journal of Real Estate Research, American Real Estate Society, vol. 32(1), pages 47-74.
    29. Curry, Timothy J. & Elmer, Peter J. & Fissel, Gary S., 2007. "Equity market data, bank failures and market efficiency," Journal of Economics and Business, Elsevier, vol. 59(6), pages 536-559.
    30. Anthony Saunders & Berry Wilson, 2001. "An Analysis of Bank Charter Value and Its Risk-Constraining Incentives," Journal of Financial Services Research, Springer;Western Finance Association, vol. 19(2), pages 185-195, April.
    31. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    32. Anderson, Ronald C. & Fraser, Donald R., 2000. "Corporate control, bank risk taking, and the health of the banking industry," Journal of Banking & Finance, Elsevier, vol. 24(8), pages 1383-1398, August.
    33. Baele, Lieven & De Jonghe, Olivier & Vander Vennet, Rudi, 2007. "Does the stock market value bank diversification?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1999-2023, July.
    34. Boot, Arnoud W. A. & Thakor, Anjan V., 1991. "Off-balance sheet liabilities, deposit insurance and capital regulation," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 825-846, September.
    35. Caprio, Gerard & Honohan, Patrick, 2004. "Can the unsophisticated market provide discipline?," Policy Research Working Paper Series 3364, The World Bank.
    36. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, vol. 43(5), pages 1219-1233, December.
    37. 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.
    38. Calem, Paul & Rob, Rafael, 1999. "The Impact of Capital-Based Regulation on Bank Risk-Taking," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 317-352, October.
    39. Kevin Stiroh, 2006. "New Evidence on the Determinants of Bank Risk," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(3), pages 237-263, December.
    40. 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 637-654, May-June.
    41. Maria Vassalou & Yuhang Xing, 2004. "Default Risk in Equity Returns," Journal of Finance, American Finance Association, vol. 59(2), pages 831-868, April.
    42. Duan, Jin-Chuan & Moreau, Arthur F. & Sealey, C. W., 1992. "Fixed-rate deposit insurance and risk-shifting behavior at commercial banks," Journal of Banking & Finance, Elsevier, vol. 16(4), pages 715-742, August.
    43. Robert R. Bliss & Mark J. Flannery, 2002. "Market Discipline in the Governance of U.S. Bank Holding Companies: Monitoring vs. Influencing," Review of Finance, European Finance Association, vol. 6(3), pages 361-396.
    44. Rebecca Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, vol. 2(Oct), pages 1-14.
    45. Christos K. Staikouras & Anastasia Koutsomanoli‐Fillipaki, 2006. "Competition and Concentration in the New European Banking Landscape," European Financial Management, European Financial Management Association, vol. 12(3), pages 443-482, June.
    46. Salas, Vicente & Saurina, Jesus, 2003. "Deregulation, market power and risk behaviour in Spanish banks," European Economic Review, Elsevier, vol. 47(6), pages 1061-1075, December.
    47. Angbazo, Lazarus, 1997. "Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking," Journal of Banking & Finance, Elsevier, vol. 21(1), pages 55-87, January.
    48. Ronn, Ehud I & Verma, Avinash K, 1986. "Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, vol. 41(4), pages 871-895, September.
    49. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
    50. Jin‐Chuan Duan, 1994. "Maximum Likelihood Estimation Using Price Data Of The Derivative Contract," Mathematical Finance, Wiley Blackwell, vol. 4(2), pages 155-167, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mbarek Lassaâd & Mezzez Hmaied Dorra, 2012. "Stock Market Assessment of Bank Risk: Evidence from the Maghreb Region," Review of Middle East Economics and Finance, De Gruyter, vol. 8(1), pages 1-26, August.
    2. Haq, Mamiza & Faff, Robert & Seth, Rama & Mohanty, Sunil, 2014. "Disciplinary tools and bank risk exposure," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 37-64.
    3. Haq, Mamiza & Heaney, Richard, 2012. "Factors determining European bank risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 696-718.
    4. Paul Kato & Jens Hagendorff, 2010. "Distance to default, subordinated debt, and distress indicators in the banking industry," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(4), pages 853-870, December.
    5. Gueyie, Jean-Pierre & Lai, Van Son, 2003. "Bank moral hazard and the introduction of official deposit insurance in Canada," International Review of Economics & Finance, Elsevier, vol. 12(2), pages 247-273.
    6. Rubi Ahmad & M. Ariff & Michael Skully, 2008. "The Determinants of Bank Capital Ratios in a Developing Economy," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 15(3), pages 255-272, December.
    7. Khoa TA Hoang & Robert Faff & Mamiza Haq, 2014. "Market discipline and bank risk taking," Australian Journal of Management, Australian School of Business, vol. 39(3), pages 327-350, August.
    8. Eichler, Stefan & Karmann, Alexander & Maltritz, Dominik, 2010. "Deriving the term structure of banking crisis risk with a compound option approach: The case of Kazakhstan," Discussion Paper Series 2: Banking and Financial Studies 2010,01, Deutsche Bundesbank.
    9. Tristan Auvray & Olivier Brossard, 2012. "Too Dispersed to Monitor? Ownership Dispersion, Monitoring, and the Prediction of Bank Distress," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 685-714, June.
    10. Van Son Lai & Xiaoxia Ye, 2019. "How Does the Stock Market View Bank Regulatory Capital Forbearance Policies?," Working Papers 2019-012, Department of Research, Ipag Business School.
    11. Apanard P. Prabha & Clas Wihlborg & Thomas D. Willett, 2012. "Market Discipline for Financial Institutions and Markets for Information," Chapters, in: James R. Barth & Chen Lin & Clas Wihlborg (ed.), Research Handbook on International Banking and Governance, chapter 13, Edward Elgar Publishing.
    12. Conlon, Thomas & Cotter, John & Molyneux, Philip, 2020. "Beyond common equity: The influence of secondary capital on bank insolvency risk," Journal of Financial Stability, Elsevier, vol. 47(C).
    13. Urs W. Birchler & Matteo Facchinetti, 2007. "Can Bank Supervisors Rely on Market Data? A Critical Assessment from a Swiss Perspective," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(II), pages 95-132, June.
    14. Randall Kroszner, 2016. "A Review of Bank Funding Cost Differentials," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(2), pages 151-174, June.
    15. Srivastav, Abhishek & Armitage, Seth & Hagendorff, Jens & King, Tim, 2018. "Better safe than sorry? CEO inside debt and risk-taking in bank acquisitions," Journal of Financial Stability, Elsevier, vol. 36(C), pages 208-224.
    16. Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2577-2603, October.
    17. Milne, Alistair, 2014. "Distance to default and the financial crisis," Journal of Financial Stability, Elsevier, vol. 12(C), pages 26-36.
    18. Eichler, Stefan & Karmann, Alexander & Maltritz, Dominik, 2011. "The term structure of banking crisis risk in the United States: A market data based compound option approach," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 876-885, April.
    19. Nier, Erlend & Baumann, Ursel, 2006. "Market discipline, disclosure and moral hazard in banking," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 332-361, July.
    20. Mohsni, Sana & Otchere, Isaac, 2018. "Does regulatory regime matter for bank risk taking? A comparative analysis of US and Canada," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 53(C), pages 1-16.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:erg:wpaper:679. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sherine Ghoneim (email available below). General contact details of provider: https://edirc.repec.org/data/erfaceg.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.