March Madness in Wall Street: (What) Does the Market Learn from Stress Tests?
IMF Working Papers, December 23, 2015
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Bibliographic details
- Authors: Marcelo Fernandes, Deniz O Igan, Marcelo Pinheiro
- Published: December 23, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513537405.001
Summary
- Annual stress tests have become a regular part of the supervisors’ toolkit following the global financial crisis.
- The paper investigates capital market implications in the United States by looking at:
- price and trade reactions,
- information asymmetry and uncertainty indicators,
- and bank activities.
- The evidence supports the notion that there is important new information in stress tests, especially at times of financial distress.
- Public disclosure seems to help reduce informational asymmetries.
- Public disclosure of stress test results (and methodology) does not seem to have reduced private incentives to generate information or to have led to distorted incentives.
Major themes and analytical focus
- Market responses to stress tests:
- price reactions,
- trade reactions.
- Information and market structure indicators:
- information asymmetry indicators,
- uncertainty indicators,
- market functioning indicator (keyword present).
- Bank behavior and regulatory context:
- bank activities,
- CCAR capital and CCAR stress tests,
- DFAST exercise,
- Capital requirements and Capital plan considerations.
- Geographic and topical scope:
- United States,
- Europe (keyword present),
- Global and North America references in keywords.
Key findings (as stated)
- Stress tests contain important new information for capital markets, particularly during periods of financial distress.
- Public disclosure of stress test results appears to reduce informational asymmetries.
- Public disclosure (including methodology) does not appear to have:
- reduced private incentives to generate information,
- led to distorted incentives.
Subjects and Keywords (as listed)
- Subjects: Banking, Financial institutions, Financial sector policy and analysis, Stocks, Stress testing
- Keywords: abnormal returns, bank, capital plan, Capital requirements, CCAR capital, CCAR stress tests, DFAST exercise, Europe, Federal Reserve object, Federal Reserve's decision, firm, Global, Information, market functioning indicator, market participant, market reaction, North America, Public disclosure, result, results release, Stocks, stress test result, Stress testing, WP
Source: IMF Working Paper "March Madness in Wall Street: (What) Does the Market Learn from Stress Tests?" by Marcelo Fernandes, Deniz O Igan, and Marcelo Pinheiro, December 23, 2015 (Working Paper No. 2015/271).
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