Inefficiency and Bank Failures: A Joint Bayesian Estimationof a Stochastic Frontier Model and a Hazards Model

Jim Sanchez-Gonzalez (), Diego Restrepo-Tobon () and Andrés Ramírez Hassan ()

No 16788, Documentos de Trabajo de Valor Público from Universidad EAFIT

Abstract: In modeling bank failure, estimating inefficiency separately from the hazards modelresults in inefficient, biased, and inconsistent estimators. We develop a method to si-multaneously estimate a stochastic frontier model and a hazards model using Bayesiantechniques. This method overcomes issues related to two-stage estimation methods,allows for computing the marginal effects of the inefficiency over the probability offailure, and facilitates statistical inference of the functions of the parameters such aselasticities, returns to scale, and individual inefficiencies. Simulation exercises showthat our proposed method performs better than two-stage maximum likelihood, spe-cially in small samples. In addition we find that inefficiency plays a statistically and economically significant role in determining the time to failure of U.S. commercial banks during 2001 to 2010.

Keywords: Technical Inefficiency; Proportional Hazards Model; Bank Failures (search for similar items in EconPapers)
JEL-codes: C11 G21 G33 (search for similar items in EconPapers)
Pages: 34
Date: 2018-08-27
New Economics Papers: this item is included in nep-ban and nep-ecm
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http://hdl.handle.net/10784/12964

Related works:
Working Paper: Inefficiency and Bank Failures: A Joint Bayesian Esti-mationof a Stochastic Frontier Model and a Hazards Model (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000122:016788

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