How Did Markets React to Stress Tests?

22 Pages Posted: 5 May 2015

See all articles by Bertrand Candelon

Bertrand Candelon

University of Maastricht - Department of Economics

Amadou Nicolas Racine Sy

International Monetary Fund (IMF) - International Capital Markets Department; Brookings Institution

Date Written: April 2015

Abstract

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.

Keywords: Stress testing, European Union, Banks, Stock markets, Macroprudential policies and financial stability, stress tests, capital, governance, recapitalization, banking, risk, banking sector, capital adequacy, debt, sovereign risk

JEL Classification: G01, G18, G24, G28

Suggested Citation

Candelon, Bertrand and Sy, Amadou Nicolas Racine, How Did Markets React to Stress Tests? (April 2015). IMF Working Paper No. 15/75, Available at SSRN: https://ssrn.com/abstract=2602674

Bertrand Candelon (Contact Author)

University of Maastricht - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Amadou Nicolas Racine Sy

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Room 9-548
Washington, DC 20431
United States
202-623-8651 (Phone)
202-589-8561 (Fax)

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

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