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The Information Value of the Stress Test

Author

Listed:
  • DONALD P. MORGAN
  • STAVROS PERISTIANI
  • VANESSA SAVINO

Abstract

We investigate whether the “stress test,” the extraordinary examination of the 19 largest U.S. bank holding companies conducted by federal bank supervisors in 2009, produced useful information for the market. Using standard event study techniques, we find that the market had largely deciphered on its own which banks would have capital gaps before the stress test results were revealed, but that the market was informed by the size of the gap; given our proxy for the expected gap, banks with larger capital gaps experienced more negative abnormal returns. Our findings are consistent with the view that the stress tests produced valuable information about banks.

Suggested Citation

  • Donald P. Morgan & Stavros Peristiani & Vanessa Savino, 2014. "The Information Value of the Stress Test," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(7), pages 1479-1500, October.
  • Handle: RePEc:wly:jmoncb:v:46:y:2014:i:7:p:1479-1500
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    File URL: http://hdl.handle.net/10.1111/jmcb.12146
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The “question” or the “answer”? Market reaction to UK stress tests
      by bankunderground in Bank Underground on 2015-11-09 13:30:59

    Citations

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    Cited by:

    1. Cecilia Parlatore, 2018. "Designing Stress Scenarios," 2018 Meeting Papers 1090, Society for Economic Dynamics.
    2. Flannery, Mark & Hirtle, Beverly & Kovner, Anna, 2017. "Evaluating the information in the federal reserve stress tests," Journal of Financial Intermediation, Elsevier, vol. 29(C), pages 1-18.
    3. Marcelo Fernandes & Deniz Igan & Marcelo Pinheiro, 2015. "March Madness in Wall Street: (What) Does the Market Learn from Stress Tests?," Working Papers 771, Queen Mary University of London, School of Economics and Finance.
    4. repec:eee:finsta:v:39:y:2018:i:c:p:147-166 is not listed on IDEAS
    5. Lukas Ahnert & Pascal Vogt & Volker Vonhoff & Florian Weigert, 2018. "The Impact of Regulatory Stress Testing on Bank's Equity and CDS Performance," Working Papers on Finance 1814, University of St. Gallen, School of Finance.
    6. Sahin, Cenkhan & de Haan, Jakob, 2016. "Market reactions to the ECB’s Comprehensive Assessment," Economics Letters, Elsevier, vol. 140(C), pages 1-5.
    7. Fischer, Jack R. & McPhail, Joseph E. & Rodrigues, Nathan & Orazem, Peter, 2017. "The Relative Importance of Macroeconomic Shocks, Regional Shocks and Idiosyncratic Risk on Large and Small Banks," ISU General Staff Papers 201707130700001027, Iowa State University, Department of Economics.
    8. Harris, Richard & Karadotchev, Veselin & Sowerbutts, Rhiannon & Stoja, Evarist, 2019. "Have FSRs got news for you? Evidence from the impact of Financial Stability Reports on market activity," Bank of England working papers 792, Bank of England.
    9. Herve Alexandre & François Guillemin & Catherine Refait-Alexandre, 2015. "Disclosure, banks CDS spreads and the European sovereign crisis," Working Papers hal-01376916, HAL.
    10. repec:eee:jetheo:v:177:y:2018:i:c:p:34-69 is not listed on IDEAS
    11. Frame, W. Scott & Gerardi, Kristopher S. & Willen, Paul S., 2015. "The failure of supervisory stress testing: Fannie Mae, Freddie Mac, and OFHEO," FRB Atlanta Working Paper 2015-3, Federal Reserve Bank of Atlanta.
    12. repec:eee:finsta:v:32:y:2017:i:c:p:86-98 is not listed on IDEAS
    13. Sengupta, Rajdeep & Black, Lamont K. & Floros , Ioannis, 2016. "Raising capital when the going gets tough: U.S. bank equity issuance from 2001 to 2014," Research Working Paper RWP 16-5, Federal Reserve Bank of Kansas City.
    14. Colonnello, Stefano & Koetter, Michael & Stieglitz, Moritz, 2019. "Benign neglect of covenant violations: Blissful banking or ignorant monitoring?," IWH Discussion Papers 3/2019, Halle Institute for Economic Research (IWH).
    15. Premti, Arjan & Garcia-Feijoo, Luis & Madura, Jeff, 2017. "Information content of analyst recommendations in the banking industry," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 35-47.
    16. repec:eee:finsta:v:32:y:2017:i:c:p:115-123 is not listed on IDEAS
    17. Carboni, Marika & Fiordelisi, Franco & Ricci, Ornella & Lopes, Francesco Saverio Stentella, 2017. "Surprised or not surprised? The investors’ reaction to the comprehensive assessment preceding the launch of the banking union," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 122-132.

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