What drives competition between banks? Cross-country analysis of liberalised Greek and Cypriot banking

This study offers an application of Infinite dimension VAR technique in measuring the performance of Greek and Cypriot financial market efficiency. The model aims to explore the forces driving the performance of a large banks proxy by returns on FTSE/ATHEX20 and FTSE/ATHEX BANKS stock indices during the period of 1997–2009. IVAR analysis can be used as either an alternative or complement to ratio or panel data analysis for the evaluation of financial market liberalisation effect on banking sector performance and economic growth, especially when the direction of causation is uncertain. We reveal the heterogeneity in responses of stock market indices to shocks in net interest spread and output gap between Greece and Cyprus as well as show that the increase in returns on FTSE/ATHEX 20 and FTSE/ATHEX BANKS is accompanied with a considerable increase in output gap. Finally, we come up with a modified ―liberalisation date‖ static approach which allowed us to capture positive effects of liberalised financial market on its efficiency.