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

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Author Info
Christophe Godlewski (LaRGE, Institut d'Etudes Politiques, Université Robert Schuman, Strasbourg 3)

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

Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
F39 - International Economics - - International Finance - - - Other
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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  1. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  2. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October. [Downloadable!] (restricted)
  3. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Knopf, John D. & Teall, John L., 1996. "Risk-taking behavior in the U.S. thrift industry: Ownership structure and regulatory changes," Journal of Banking & Finance, Elsevier, vol. 20(8), pages 1329-1350, September. [Downloadable!] (restricted)
  5. Patrick Honohan, 1997. "Banking system failures in developing and transition countries: Diagnosis and predictions," BIS Working Papers 39, Bank for International Settlements. [Downloadable!]
  6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  7. Nicholas Barberis & Richard Thaler, 2002. "A Survey of Behavioral Finance," NBER Working Papers 9222, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December. [Downloadable!] (restricted)
  9. Busse, Jeffrey A., 2001. "Another Look at Mutual Fund Tournaments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 53-73, March. [Downloadable!]
  10. Fred C. Graham & James E. Horner, 1988. "Bank failure: an evaluation of the factors contributing to the failure of national banks," Proceedings, Federal Reserve Bank of Chicago, pages 405-435.
  11. Taylor, Jonathan, 2003. "Risk-taking behavior in mutual fund tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 50(3), pages 373-383, March. [Downloadable!] (restricted)
  12. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June. [Downloadable!] (restricted)
  13. Cordella, Tito & Levy Yeyati, Eduardo, 1998. "Financial Opening, Deposit Insurance and Risk in a Model of Banking Competition," CEPR Discussion Papers 1939, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Coleen C. Pantalone & Marjorie B. Platt, 1987. "Predicting commercial bank failure since deregulation," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 37-47.
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