The Impact of Regulatory Stress Testing on Bank's Equity and CDS Performance

35 Pages Posted: 29 May 2018

See all articles by Lukas Ahnert

Lukas Ahnert

University of St. Gallen

Pascal Vogt

Boston Consulting Group - Germany

Volker Vonhoff

University of Mannheim - Department of Business Administration and Finance

Florian Weigert

University of St. Gallen - School of Finance

Date Written: May 17, 2018

Abstract

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

Ahnert, Lukas and Vogt, Pascal and Vonhoff, Volker and Weigert, Florian, The Impact of Regulatory Stress Testing on Bank's Equity and CDS Performance (May 17, 2018). University of St.Gallen, School of Finance Research Paper No. 2018/15. Available at SSRN: https://ssrn.com/abstract=3179540 or http://dx.doi.org/10.2139/ssrn.3179540

Lukas Ahnert

University of St. Gallen ( email )

Langgasse 1
St. Gallen, 9008
Switzerland

Pascal Vogt

Boston Consulting Group - Germany ( email )

Cologne
Germany

Volker Vonhoff

University of Mannheim - Department of Business Administration and Finance ( email )

Mannheim, 68131
Germany
+49 621 181-1518 (Phone)
+49 621 181-1519 (Fax)

HOME PAGE: http://finanzierung.bwl.uni-mannheim.de/de/faculty/alumni/vonhoff/

Florian Weigert (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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