Performance and Merton-type default risk of listed banks in the EU: A panel VAR approach

Anastasia Koutsomanoli-Filippaki and Emmanuel Mamatzakis

Journal of Banking & Finance, 2009, vol. 33, issue 11, 2050-2061

Abstract: This paper provides empirical evidence that sheds new light into the dynamic interactions between risk and efficiency, a highly debated issue. First, we estimate three alternative measures of bank performance, 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. 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. 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)
Date: 2009
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Citations: View citations in EconPapers (66)

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Working Paper: Performance and Merton-Type Default Risk of Listed Banks in EU: a panel VAR approach (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:11:p:2050-2061

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