Estimating cost efficiency of Turkish commercial banks under unobserved heterogeneity with stochastic frontier models

Abstract

This study aims to investigate the cost efŞciency of Turkish commercial banks over the restructuringperiod of the Turkish banking system, which coincides with the 2008Şnancial global crisis and the 2010European sovereign debt crisis. To this end, within the stochastic frontier framework, we employ trueŞxed effects model, where the unobserved bank heterogeneity is integrated in the inefŞciency distribution at a mean level. To select the cost function with the most appropriate inefŞciency correlates, weŞrst adopt a search algorithm and then utilize the model averaging approach to verify that our results arenot exposed to model selection bias. Overall, our empirical results reveal that cost efbanks have improved over time, with the effects of the 2008 and 2010 crises remaining rather limited.Furthermore, not only the cost efŞciency scores but also impacts of the crises on those scores appear tovary with regard to bank size and ownership structure, in accordance with much of the existingliterature.© 2016 Central Bank of The Republic of Turkey. Production and hosting by Elsevier B.V. This is an openaccess article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)