How Did Markets React to Stress Tests?

April 1, 2015

Preview Citation

Format: Chicago

Bertrand Candelon, and Amadou N Sy. How Did Markets React to Stress Tests?, (USA: International Monetary Fund, 2015) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We use event study methods to compare the market reaction to U.S. and EU-wide stress tests performed from 2009 to 2013. Typically, stress tests have a positive impact on stressed banks’ returns. While the 2009 U.S. stress test had a large positive outcome, the impact of subsequent U.S. exercises decreased over time. The 2011 EU exercise is the only EU-wide stress test that resulted in a significant negative market reaction. Comparing past exercises suggests that the qualitative aspects of the governance of stress tests can matter more for stock market participants than technical elements, such as the level of the minimum capital adequacy threshold or the extent of data disclosure.

Subject: Banking, Capital adequacy requirements, Financial regulation and supervision, Financial sector policy and analysis, Macroprudential stress testing, Stress testing

Keywords: Abnormal returns, Bank, Capital adequacy requirements, EU 2010, EU bank, EU capital exercise, EU capitalization exercise, EU entity, EU exercise, EU recapitalization, EU recapitalization exercise, Europe, Financial stability, Macroprudential, Macroprudential stress testing, Market, Recapitalization exercise, Stress testing, Stress tests, WP

Publication Details

Pages:

21
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/075
Stock No:

WPIEA2015075
ISBN:

9781484315378
ISSN:

1018-5941

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