Incorporating Risk into Technical Efficiency: The Case of ASEAN Banks
Authors: Tra Ngo Thanh , Minh Le Quang , Thien Khoa Cai Phuc , Thanh Ngo Phu 
Published: June 2018

The objective of this paper is to incorporate risk in technical efficiency of listed ASEAN banks in a panel data framework for the period 2000 to 2015. Many researchers apply frontier estimation techniques such as data envelopment analysis (DEA) or stochastic frontier analysis (SFA) for their efficiency analysis. However, the banks’ complex production process requires more sophisticated techniques to account for internal structures within the black box so relying only traditional DEA or SFA is not adequate to deal with a multiple-input and multiple-output production technology. To incorporate undesirable outputs such as risk into inefficiency, we rely on the directional distance function (DDF). We employ the DDF under both parametric (SFA) and semi-parametric (SEMSFA) framework to make a comparison efficiency scores with risk adjusted in two scenarios. Our results suggest that risk is an important factor that bank managers should pay more focus to achieve long-term efficiency in ASEAN banks

Keywords

Bank efficiency; risk; directional distance function (DDF); semiparametric estimation of stochastic frontier models (SEMSFA)

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