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Do CDS Maturities Matter in the Evaluation of the Information Content of Regulatory Banking Stress Tests? Evidence from European and US Stress Tests

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  • Amavi S. S. Agbodji
  • Emmanuelle Nys
  • Alain Sauviat

Abstract

This paper questions the relevance of using only the 5-year maturity CDS spreads in the examination of the CDS market response to the disclosure of regulatory stress test results. Do the 5-year CDS contracts reflect all the relevant information on the response of the CDS market? Indeed, since a stress testing exercise measures tested banks? risk at different horizons, we suspect a difference in the market response depending on the horizons. Our empirical study shows that following the disclosure of stress tests? results, the information content provided by the different maturities differs. Therefore, simply using 5-year maturity CDS to assess banking risk is not sufficient. JEL Codes: G00, G14, G21, G28.

Suggested Citation

  • Amavi S. S. Agbodji & Emmanuelle Nys & Alain Sauviat, 2021. "Do CDS Maturities Matter in the Evaluation of the Information Content of Regulatory Banking Stress Tests? Evidence from European and US Stress Tests," Revue économique, Presses de Sciences-Po, vol. 72(1), pages 65-102.
    • Handle: RePEc:cai:recosp:reco_721_0065
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    More about this item

    Keywords

    regulatory stress tests; CDS maturities; market reaction; event study;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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