How Did Markets React to Stress Tests?
April 1, 2015
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Summary
We use event study methods to compare the market reaction to U.S. and EU-wide stress tests performed from 2009 to 2013. Typically, stress tests have a positive impact on stressed banks’ returns. While the 2009 U.S. stress test had a large positive outcome, the impact of subsequent U.S. exercises decreased over time. The 2011 EU exercise is the only EU-wide stress test that resulted in a significant negative market reaction. Comparing past exercises suggests that the qualitative aspects of the governance of stress tests can matter more for stock market participants than technical elements, such as the level of the minimum capital adequacy threshold or the extent of data disclosure.
Subject: Banking, Capital adequacy requirements, Financial regulation and supervision, Financial sector policy and analysis, Macroprudential stress testing, Stress testing
Keywords: abnormal returns, bank, Capital adequacy requirements, EU 2010, EU bank, EU capital exercise, EU capitalization exercise, EU entity, EU exercise, EU recapitalization, EU recapitalization exercise, Europe, financial stability, macroprudential, Macroprudential stress testing, market, recapitalization exercise, Stress testing, stress tests, WP
Pages:
21
Volume:
2015
DOI:
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Issue:
075
Series:
Working Paper No. 2015/075
Stock No:
WPIEA2015075
ISBN:
9781484315378
ISSN:
1018-5941
