A new method to estimate the risk of financial intermediaries
AbstractIn this paper we reconsider the formal estimation of the risk of financial intermediaries. Risk is modeled as the variability of the profit function of a representative intermediary, here bank, as formally considered in finance theory. In turn, banking theory suggests that risk is determined simultaneously with profits and other bank- and industry-level characteristics that cannot be considered predetermined when profit maximizing decisions of financial institutions are to be made. Thus, risk is endogenous. We estimate the model on a panel of US banks, spanning the period 1985q1-2010q2. The findings suggest that risk was fairly stable up to 2001 and accelerated quickly thereafter and up to 2007. Indices of bank risk commonly used in the literature do not capture this trend and/or the scale of the increase.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 34735.
Date of creation: 15 Nov 2011
Date of revision:
Risk of financial intermediaries; Endogenous risk; Full information maximum likelihood; Profit function; Duality;
Find related papers by JEL classification:
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-21 (All new papers)
- NEP-BAN-2011-11-21 (Banking)
- NEP-RMG-2011-11-21 (Risk Management)
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