Frontier cost functions and bank efficiency

An extension of the translog cost function, where some trigonometric terms are added to gain better fit to the data, has gained popularity in recent literature examining efficiency rankings of banks. This paper demonstrates that the goodness-of-fit criterion is an unreliable indicator of forecasting ability, thus casting doubts on the validity of conclusions derived from the use of above frontier cost functions. (C) 2001 Elsevier Science B.V. All rights reserved.