On the Estimation of the Risk of Financial Intermediaries

36 Pages Posted: 9 Oct 2012

See all articles by Manthos D. Delis

Manthos D. Delis

Montpellier Business School

Efthymios G. Tsionas

Athens University of Economics and Business - Department of Economics

Date Written: June 6, 2012

Abstract

In this paper we reconsider the formal estimation of the risk of financial intermediaries. Risk is modeled as the variability of the profit function of a representative intermediary, here bank, as formally considered in finance theory. In turn, banking theory suggests that risk is determined simultaneously with profits and other bank- and industry-level characteristics that cannot be considered predetermined when profit maximizing decisions of financial institutions are to be made. Thus, risk is endogenous. We estimate the model on a panel of US banks, spanning the period 1985q1-2010q2. The findings suggest that risk was fairly stable up to 2001 and accelerated quickly thereafter and up to 2007. Indices of bank risk commonly used in the literature do not capture this trend and/or the scale of the increase.

Suggested Citation

Delis, Manthos D. and Tsionas, Efthymios (Efthymios) G., On the Estimation of the Risk of Financial Intermediaries (June 6, 2012). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: https://ssrn.com/abstract=2083729 or http://dx.doi.org/10.2139/ssrn.2083729

Manthos D. Delis (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Efthymios (Efthymios) G. Tsionas

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+301 8203 (Phone)
+301 8203 301 (Fax)

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