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Cost efficiency of the Chinese banking sector: A comparison of stochastic frontier analysis and data envelopment analysis

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  • Dong, Yizhe
  • Hamilton, Robert
  • Tippett, Mark

Abstract

This paper investigates the consistency of efficiency scores obtained from the stochastic frontier analysis and data envelopment analysis methods. We estimate cost efficiency and economies of scale based on an unbalanced panel data set of Chinese banks over the period 1994 to 2007. The results suggest moderate consistency between parametric and non-parametric frontier methods in efficiency scores rankings, identification of best and worst practise banks, the stability of efficiency scores over time and correlation between frontier efficiency and accounting based performance measures. Based on the findings, we conclude that the use of multiple frontier techniques for efficiency analysis is to be strongly recommended and that this methodological cross-checking analysis will result in more robust and convincing assessments of bank performance.

Suggested Citation

  • Dong, Yizhe & Hamilton, Robert & Tippett, Mark, 2014. "Cost efficiency of the Chinese banking sector: A comparison of stochastic frontier analysis and data envelopment analysis," Economic Modelling, Elsevier, vol. 36(C), pages 298-308.
    • Handle: RePEc:eee:ecmode:v:36:y:2014:i:c:p:298-308
    DOI: 10.1016/j.econmod.2013.09.042
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    More about this item

    Keywords

    Cost efficiency; Stochastic frontier analysis; Data envelope analysis; Chinese banking;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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