Stock Market Assessment of Bank Risk: Evidence from the Maghreb Region

Lassaâd Mbarek () and Dorra Hmaied
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Lassaâd Mbarek: Central Bank of Tunisia

No 679, Working Papers from Economic Research Forum

Abstract: This paper examines the ability of stock market investors to monitor bank risk for a sample of listed banks in Tunisia and Morocco over the period 2003-2009. We construct various market-based risk measures derived from the market model as well as the distance-to-default derived from the structural model of credit risk. Using a panel data analysis, we show that market-based measures of risk are strongly associated to bank fundamental characteristics, especially capital and size. This finding has important implications for regulators as shareholders are able to assess a bank’s financial condition and hence exert effective discipline on the bank’s risk-taking behavior.

Pages: 24
Date: 2012, Revised 2012
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