Bank Efficiency in Transitional Countries: Sensitivity to Stochastic Frontier Design

31 Pages Posted: 16 Dec 2010

Date Written: September 15, 2010

Abstract

This article provides an empirical insight on the heterogeneity in the estimates of banking efficiency produced by the stochastic frontier approach. Using data from five countries of Central and Eastern Europe, we study the sensitivity of the efficiency score and the efficiency ranking to a change in the design of the frontier. We found that the average scores are significantly smaller when the transcendental logarithmic functional form is used in the profi t efficiency measurement and when the scaling effect is neglected in the cost efficiency measurement. The implied bank ranking is robust to changes in the stochastic frontier definition for cost efficiency, but not for pro fit efficiency.

Keywords: Banking, Efficiency Analysis, Stochastic Frontier Approach, Transitional Countries

JEL Classification: C13, G21, L25

Suggested Citation

Irsova, Zuzana, Bank Efficiency in Transitional Countries: Sensitivity to Stochastic Frontier Design (September 15, 2010). William Davidson Institute Working Paper No. 998, Available at SSRN: https://ssrn.com/abstract=1725990 or http://dx.doi.org/10.2139/ssrn.1725990

Zuzana Irsova (Contact Author)

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

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