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Handling losses in translog profit models

Author

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  • Bos, J.W.B.
  • Koetter, M.

Abstract

In this paper, we compare standard approaches used to handle losses in logarithmic stochastic profit frontier models with a simple novel approach. We discuss discriminatory power, rank stability and precision of profit efficiency scores. Our new method enhances rank stability and discriminatory power, and improves the precision of profit efficiency scores.

Suggested Citation

  • Bos, J.W.B. & Koetter, M., 2006. "Handling losses in translog profit models," MPRA Paper 1433, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:1433
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    References listed on IDEAS

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    1. Humphrey, David B & Pulley, Lawrence B, 1997. "Banks' Responses to Deregulation: Profits, Technology, and Efficiency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 73-93, February.
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    4. Maudos, Joaquin & Pastor, Jose M. & Perez, Francisco & Quesada, Javier, 2002. "Cost and profit efficiency in European banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 33-58, February.
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    6. Bauer, Paul W. & Berger, Allen N. & Ferrier, Gary D. & Humphrey, David B., 1998. "Consistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods," Journal of Economics and Business, Elsevier, vol. 50(2), pages 85-114, March.
    7. Kumbhakar,Subal C. & Lovell,C. A. Knox, 2003. "Stochastic Frontier Analysis," Cambridge Books, Cambridge University Press, number 9780521666633, September.
    8. Michael Koetter, 2006. "Measurement Matters—Alternative Input Price Proxies for Bank Efficiency Analyses," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(2), pages 199-227, October.
    9. Bos, J.W.B. & Koetter, M. & Kolari, J.W. & Kool, C.J.M., 2009. "Effects of heterogeneity on bank efficiency scores," European Journal of Operational Research, Elsevier, vol. 195(1), pages 251-261, May.
    10. Juan Fernández De Guevara & Joaquin Maudos, 2002. "Inequalities in the efficiency of the banking sectors of the European Union," Applied Economics Letters, Taylor & Francis Journals, vol. 9(8), pages 541-544.
    11. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
    12. Vander Vennet, Rudi, 2002. "Cost and Profit Efficiency of Financial Conglomerates and Universal Banks in Europe," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 254-282, February.
    13. Adnan Kasman & Canan Yildirim, 2006. "Cost and profit efficiencies in transition banking: the case of new EU members," Applied Economics, Taylor & Francis Journals, vol. 38(9), pages 1079-1090.
    14. Rolf Fare & Shawna Grosskopf & William Weber, 2004. "The effect of risk-based capital requirements on profit efficiency in banking," Applied Economics, Taylor & Francis Journals, vol. 36(15), pages 1731-1743.
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    More about this item

    Keywords

    profit efficiency; stochastic frontier analysis; truncation and censoring;
    All these keywords.

    JEL classification:

    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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