March Madness in Wall Street: (What) Does the Market Learn from Stress Tests?

35 Pages Posted: 3 Feb 2016

See all articles by Marcelo Fernandes

Marcelo Fernandes

Queen Mary University of London - Economics Department

Deniz Igan

International Monetary Fund (IMF) - Financial Studies Division

Marcelo Pinheiro

PCAOB

Date Written: December 2015

Abstract

Annual stress tests have become a regular part of the supervisors' toolkit following the global financial crisis. We investigate their capital market implications in the United States by looking at price and trade reactions, information asymmetry and uncertainty indicators, and bank activities. The evidence we present supports the notion that there is important new information in stress tests, especially at times of financial distress. Moreover, public disclosure seems to help reduce informational asymmetries. Importantly, public disclosure of stress test results (and methodology) does not seem to have reduced private incentives to generate information or to have led to distorted incentives.

Keywords: Stress testing, Capital requirements, Public disclosure, Information, banks, bank, capital, risk, holding companies, Government Policy and Regulation, All Countries,

JEL Classification: G14, G28, G32

Suggested Citation

Fernandes, Marcelo and Igan, Deniz and Pinheiro, Marcelo, March Madness in Wall Street: (What) Does the Market Learn from Stress Tests? (December 2015). IMF Working Paper No. 15/271, Available at SSRN: https://ssrn.com/abstract=2727220

Marcelo Fernandes (Contact Author)

Queen Mary University of London - Economics Department ( email )

Mile End Road
London, E1 4NS
United Kingdom
+44 (0)20 7882 5082 (Phone)
+44 (0)20 8983 3580 (Fax)

Deniz Igan

International Monetary Fund (IMF) - Financial Studies Division ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Marcelo Pinheiro

PCAOB ( email )

1666 K St NW
800
Washington, DC DC 20006
United States

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