The Stability Of Efficiency Rankings When Risk-Preferences And Objectives Are Different
- Topics:
- Efficiency
- Source:
- Deutsche Bundesbank
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Overview: This paper analyzes the stability of efficiency rankings of German universal banks between 1993 and 2004. Firstly the traditional efficiency scores are estimated with stochastic cost and alternative profit frontier analysis. Then, it is explicitly allowed for different risk preferences and measure efficiency with a structural model based on utility maximization. Using the almost ideal demand system, the input and profit demand functions were estimated to obtain proxies for expected return and risk. Efficiency is then measured in this risk-return space. Mean risk-return efficiency is somewhat higher than cost and considerably higher than profit efficiency. This suggests that best-practice institutes should not be identified on the basis of traditional efficiency measures alone. Apparently, low cost and/or profit efficiency may merely result from alternative yet efficiently chosen risk-return trade-offs.
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Format: PDF | Size: 644KB | Date: Nov 2006 | Pages: 44
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