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

Anastasia Koutsomanoli-Filippaki and Emmanuel Mamatzakis

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: 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.

Keywords: bank inefficiency; default risk; panel VAR; causality. (search for similar items in EconPapers)
JEL-codes: D21 G21 G28 (search for similar items in EconPapers)
Date: 2009-04, Revised 2009-04
New Economics Papers: this item is included in nep-ban, nep-eec, nep-eff and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (66)

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Journal Article: Performance and Merton-type default risk of listed banks in the EU: A panel VAR approach (2009)
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