Evaluating the Information in the Federal Reserve Stress Tests
51 Pages Posted: 6 Oct 2015 Last revised: 30 Aug 2017
Date Written: 2015-10-01
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: Suggested Citation