Evaluating the Information in the Federal Reserve Stress Tests

51 Pages Posted: 6 Oct 2015 Last revised: 30 Aug 2017

See all articles by Mark J. Flannery

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Beverly Hirtle

Federal Reserve Bank of New York - Banking Studies Department

Anna Kovner

Federal Reserve Bank of New York

Date Written: 2015-10-01

Abstract

We present evidence that the Federal Reserve stress tests produce information about both the stress-tested bank holding companies and the overall state of the banking industry. Our evidence goes beyond a standard event study, which cannot differentiate between small abnormal returns and large, but opposite‐signed, abnormal stock returns. We find that stress test disclosures are associated with significantly higher absolute abnormal returns, as well as higher abnormal trading volume. More levered and riskier holding companies seem to be more affected by the stress test information. We find no evidence that stress test disclosures have reduced the production of private information. After disclosure begins, stress tested firms attract equity analysts without changing analysts’ forecast dispersions or their mean forecast error.

Keywords: stress test, bank capital, event study

JEL Classification: G14, G21, G28

Suggested Citation

Flannery, Mark Jeffrey and Hirtle, Beverly and Kovner, Anna, Evaluating the Information in the Federal Reserve Stress Tests (2015-10-01). FRB of NY Staff Report No. 744. Available at SSRN: https://ssrn.com/abstract=2669837

Mark Jeffrey Flannery (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

Beverly Hirtle

Federal Reserve Bank of New York - Banking Studies Department ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7544 (Phone)
212-720-8363 (Fax)

Anna Kovner

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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