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Market Discipline in Commercial Banking: Evidence from Market for Bank Equity (Afzal A., Mirza N.)

Risk-taking and Risk Management

Abstract This paper presents empirical evidence of market discipline using a panel data set of listed banks at Karachi Stock Exchange. We construct multiple risk based measures from the stock prices between 2004 and 2009 to analyze if increase in risk profile resulted in an increase in compensation for the depositors and other creditors. The risk variables included market risk, value at risk, size and value premium, default likely indicator, price relatives and a control variable of GDP growth. We find significant relationship between our risk factors and cost of deposits indicating that banks align deposit compensation with the risk perception of the bank. However, we could not find a link between market perception of risk and deposit switching. These findings have important implications for policy makers as market discipline could compliment the regulatory role of state and lower the cost of supervision. Our estimations of value at risk and default likely indicator using stochastic simulations is a methodological contribution that can be used for effective risk management practices.This paper presents empirical evidence of market discipline using a panel data set of listed banks at Karachi Stock Exchange. We construct multiple risk based measures from the stock prices between 2004 and 2009 to analyze if increase in risk profile resulted in an increase in compensation for the depositors and other creditors. The risk variables included market risk, value at risk, size and value premium, default likely indicator, price relatives and a control variable of GDP growth. We find significant relationship between our risk factors and cost of deposits indicating that banks align deposit compensation with the risk perception of the bank. However, we could not find a link between market perception of risk and deposit switching. These findings have important implications for policy makers as market discipline could compliment the regulatory role of state and lower the cost of supervision. Our estimations of value at risk and default likely indicator using stochastic simulations is a methodological contribution that can be used for effective risk management practices.
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Libref/ Afzal A., Mirza N. (2011) "Market Discipline in Commercial Banking: Evidence from Market for Bank Equity", pp. 1 - 27
© Программирование — Александр Красильников, 2008
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