How Did Markets React to Stress Tests?
22 Pages Posted: 5 May 2015
Date Written: April 2015
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: Suggested Citation