The Impact of Regulatory Stress Testing on Bank's Equity and CDS Performance
35 Pages Posted: 29 May 2018
Date Written: May 17, 2018
This paper investigates the impact of stress testing results on bank's equity and CDS performance using a large sample of ten tests from the US CCAR and the European EBA regimes in the time period between 2010 and 2017. We find that passing banks experience positive abnormal equity returns and tighter CDS spreads, while failing banks show strong drops in equity prices and widening CDS spreads. Interestingly, we also document strong market reactions at the announcement date of the stress tests. A bank’s asset quality and its return on equity at the time of the announcement are significant predictors of the pass/fail outcome of a bank.
Keywords: Banks, Stress Testing, Equity Performance, CDS Performance
JEL Classification: G00, G21, G28
Suggested Citation: Suggested Citation