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Performance and Merton-Type Default Risk of Listed Banks in EU: a panel VAR approach

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This paper provides empirical evidence that sheds new light into the dynamic interactions between risk and efficiency, a highly debated issue in the literature. Using a large panel data set that includes 251 listed banks operating in the enlarged European Union over the period 1998 to 2006 this study exploits a three-step procedure. First, we estimate three alternative measures of bank performance, based on alternative efficiency definitions, by employing a directional distance function framework, along with a cost frontier and a profit function. As a second step, we calculate a Merton type bank default risk, based on the Black and Scholes (1973) option pricing theory. Then, we employ a Panel-VAR analysis, which allows the examination of the underlying relationships between efficiency and risk without applying any a-priori restrictions. Most evidence shows that the effect of a one standard deviation shock of the distance to default on inefficiency is negative and substantial. There is some evidence of a reverse causation, but the impact of a shock in bank inefficiency on risk is small and lasts for a short period of time. As part of a sensitivity analysis, we extent our study to investigate the relationship between efficiency and default risk for banks with different types of ownership structures and across financial systems with different levels of development.

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  • Anastasia Koutsomanoli-Filippaki & Emmanuel Mamatzakis, 2009. "Performance and Merton-Type Default Risk of Listed Banks in EU: a panel VAR approach," Discussion Paper Series 2009_09, Department of Economics, University of Macedonia, revised Apr 2009.
  • Handle: RePEc:mcd:mcddps:2009_09
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    File URL: http://aphrodite.uom.gr/econwp/pdf/dp0909.pdf
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    More about this item

    Keywords

    bank inefficiency; default risk; panel VAR; causality.;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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