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  • Banking risk with Appendix August 2015

    Rights statement: This is the author’s version of a work that was accepted for publication in European Journal of Operational Research. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Journal of Operational Research, 250, 1, 2016 DOI: 10.1016/j.ejor.2015.09.057

    Accepted author manuscript, 1 MB, PDF document

    Available under license: CC BY-NC-ND: Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License

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Parameters measuring bank risk and their estimation

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>1/04/2016
<mark>Journal</mark>European Journal of Operational Research
Issue number1
Volume250
Number of pages14
Pages (from-to)291-304
Publication statusPublished
Early online date23/10/15
Original languageEnglish

Abstract

The paper develops estimation of three parameters of banking risk based on an explicit model of expected utility maximization by financial institutions subject to the classical technology restrictions of neoclassical production theory. The parameters are risk aversion, prudence or downside risk aversion and generalized risk resulting from a factor model of loan prices. The model can be estimated using standard econometric techniques, like GMM for dynamic panel data and latent factor analysis for the estimation of covariance matrices. An explicit functional form for the utility function is not needed and we show how measures of risk aversion and prudence (downside risk aversion) can be derived and estimated from the model. The model is estimated using data for Eurozone countries and we focus particularly on (i) the use of the modeling approach as a device close to an “early warning mechanism”, (ii) the bank- and country-specific estimates of risk aversion and prudence (downside risk aversion), and (iii) the derivation of a generalized measure of risk that relies on loan-price uncertainty. Moreover, the model provides estimates of loan price distortions and thus, allocative efficiency.

Bibliographic note

This is the author’s version of a work that was accepted for publication in European Journal of Operational Research. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Journal of Operational Research, 250, 1, 2016 DOI: 10.1016/j.ejor.2015.09.057