Banking Stress Test Effects on Returns and Risks
26 Pages Posted: 12 Apr 2014 Last revised: 21 Aug 2015
Date Written: April 10, 2015
We investigate the effects of the announcement and the disclosure of the clarification, methodology, and outcomes of the US banking stress tests on banks' equity prices, credit risk, systematic risk, and systemic risk during the 2009-13 period. We find only weak evidence that stress tests after 2009 affected equity returns of large US banks. In contrast, CDS spreads declined in response to the disclosure of stress test results. We also find that bank systematic risk, as measured by betas, declined in some years after the publication of stress test results. Our evidence suggests that stress tests affect systemic risk.
Keywords: stress tests, bank equity returns, CDS spreads, bank betas, systemic risk
JEL Classification: G21, G28
Suggested Citation: Suggested Citation