Handling losses in translog profit models

Bos, J.W.B. and Koetter, M. (2006): Handling losses in translog profit models. Unpublished.

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.

• Item Type: MPRA Paper
• Institution: Utrecht School of Economics
• Language: English
• Keywords: profit efficiency; stochastic frontier analysis; truncation and censoring
• Subjects: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production; C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C24 - Truncated and Censored Models; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

References

Atkinson, S. E. and P. W. Wilson (1995), “Comparing Mean Efficiency and Productivity Scores from Small Samples: A Bootstrap Methodology,” Journal of Productivity Analysis, 7, 257—282. Bauer, P. W., A. N. Berger, G. D. Ferrier, and D. B. Humphrey (1998), “Consistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods,” Journal of Economics and Business, 50, 85–114. Berger, A. N. and L. J. Mester (1997), “Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions,” Journal of Banking & Finance, 21, 895–947. Faere, R., S. Grosskopf, and W.L. Weber (2004), “The effect of risk-based capital requirements on profit efficiency in banking,” Applied Economics, 36, 1731–1743. Greene, W. H. (2002), Limdep 8.0 Econometric Modelling Guide, Volume 2, Econometric Software, Castle Hill, Australia. Greene, W. H. (2003), Econometric Analysis, 5th Edition, Prentice Hall, New Jersey, U.S.. Hasenkamp, G. (1976), Specification and Estimation of Multiple-Output Production Functions, Springer, New York, U.S.. Humphrey, D. H. and B. Pulley, Lawrence (1997), “Bank’s Response to Deregulation: Profits, Technology and Efficiency,” Journal of Money, Credit, and Banking 29, 73–93. Jondrow, J., C. A. K. Lovell, S. Van Materov, and P. Schmidt (1982), “On the Estimation of Technical Inefficiency in the Stochastic Frontier Production Function Model,” Journal of Econometrics, 19, 233–238. Koetter, M. (2006), “Measurement Matters - Alternative Input Price Proxies for Bank Efficiency Analyses,” Journal of Financial Services Research, forthcoming. Kumbhakar, S.C. and C.A. Knox Lovell (2003), Stochastic Frontier Analysis, Cambridge University Press, Cambridge. Maudos, J., J. M. Pastor, F. Perez and J. Quesada (2002), “Cost and Profit Efficiency in European Banks,” Journal of International Financial Markets, Institutions and Money, 12, 33-58. Vander Vennet, R. (2002), “Cost and Profit Efficiency of Financial Conglomerates and Universal Banks in Europe,” Journal of Money, Credit, and Banking, 34, 254-282.