Stock market assessment of bank risk : evidence from the maghreb region

Abstract EN

This paper examines the ability of stock market investors to monitor bank risk for a sample of listed banks in Tunisia and Morocco over the period 2003-2009.

We construct various market-based risk measures derived from the market model as well as the distance-to-default derived from the structural model of credit risk.

Using a panel data analysis, we show that market-based measures of risk are strongly associated to bank fundamental characteristics, especially capital and size.

This finding has important implications for regulators as shareholders are able to assess a bank’s financial condition and hence exert effective discipline on the bank’s risk-taking behavior.

JEL Classification: G14, G21, G32 Keywords: Market discipline, Monitoring, Bank stock returns, Distance-to-default