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Bank Risk-Taking in a Prospect Theory Framework Empirical Investigation in the Emerging Markets’ Case

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  • Christophe Godlewski

    (LaRGE, Institut d'Etudes Politiques, Université Robert Schuman, Strasbourg 3)

Abstract

The purpose of this paper is to investigate the validity of some behavioral conjectures as alternative explanations of bank risk-taking behavior. We especially focus on the different valuation of gains and losses relative to a reference point, and the changing attitude toward risk conditional on the domain (gains vs losses) features (Tversky and Kahneman 1992). We follow a methodology based on Fiegenbaum and Thomas (1988) and the Fishburn (1977) measure of risk, applied to a sample of banks from emerging market economies. Preliminary results show that the Tversky and Kahneman (1992) framework could provide an alternative for explaining risk-taking behavior in the banking industry. Bankers located above benchmark levels, exhibit risk aversion. Although, further investigations are needed in order to consolidate our conclusions.

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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0409024.

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Date of creation: 08 Sep 2004
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Handle: RePEc:wpa:wuwpfi:0409024

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Keywords: Cumulative Prospect Theory; bank risk taking; emerging market economies;

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