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Evaluating the information in the Federal Reserve stress tests

Author

Listed:
  • Flannery, Mark J.

    (Securities and Exchange Commission and the University of Florida)

  • Hirtle, Beverly

    (Federal Reserve Bank of New York)

  • Kovner, Anna

    (Federal Reserve Bank of New York)

Abstract

We present evidence that the Federal Reserve stress tests produce information about both the stress-tested bank holding companies and the overall state of the banking industry. Our evidence goes beyond a standard event study, which cannot differentiate between small abnormal returns and large, but opposite‐signed, abnormal stock returns. We find that stress test disclosures are associated with significantly higher absolute abnormal returns, as well as higher abnormal trading volume. More levered and riskier holding companies seem to be more affected by the stress test information. We find no evidence that stress test disclosures have reduced the production of private information. After disclosure begins, stress tested firms attract equity analysts without changing analysts’ forecast dispersions or their mean forecast error.

Suggested Citation

  • Flannery, Mark J. & Hirtle, Beverly & Kovner, Anna, 2015. "Evaluating the information in the Federal Reserve stress tests," Staff Reports 744, Federal Reserve Bank of New York, revised 01 Aug 2016.
  • Handle: RePEc:fip:fednsr:744
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    References listed on IDEAS

    as
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    Citations

    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. repec:eee:jfinin:v:34:y:2018:i:c:p:58-90 is not listed on IDEAS
    3. Charles W. Calomiris & Mark Carlson, 2018. "Bank Examiners’ Information and Expertise and Their Role in Monitoring and Disciplining Banks Before and During the Panic of 1893," NBER Working Papers 24460, National Bureau of Economic Research, Inc.
    4. 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.
    5. repec:eee:jfinin:v:34:y:2018:i:c:p:17-31 is not listed on IDEAS
    6. Thomas Philippon & Pierre Pessarossi & Boubacar Camara, 2017. "Backtesting European Stress Tests," NBER Working Papers 23083, National Bureau of Economic Research, Inc.
    7. Kovner, Anna & Van Tassel, Peter, 2018. "Evaluating regulatory reform: banks’ cost of capital and lending," Staff Reports 854, Federal Reserve Bank of New York, revised 01 May 2019.
    8. Kim, Sooji & Plosser, Matthew C. & Santos, João A.C., 2018. "Macroprudential policy and the revolving door of risk: Lessons from leveraged lending guidance," Journal of Financial Intermediation, Elsevier, vol. 34(C), pages 17-31.
    9. repec:eee:jetheo:v:177:y:2018:i:c:p:34-69 is not listed on IDEAS
    10. repec:eee:ejores:v:274:y:2019:i:3:p:1180-1197 is not listed on IDEAS
    11. repec:bin:bpeajo:v:48:y:2017:i:2017-02:p:479-565 is not listed on IDEAS
    12. Orlov, Dmitry & Zryumov, Pavel & Skrzypacz, Andrzej, 2017. "Design of Macro-prudential Stress Tests," Research Papers 3548, Stanford University, Graduate School of Business.
    13. repec:eee:finsta:v:32:y:2017:i:c:p:86-98 is not listed on IDEAS
    14. Cortes, Kristle Romero & Demyanyk, Yuliya & Li, Lei & Loutskina, Elena & Strahan, Philip E., 2018. "Stress Tests and Small Business Lending," Working Papers (Old Series) 1802, Federal Reserve Bank of Cleveland.
    15. Brunella Bruno & Immacolata Marino, 2018. "How Banks Respond to NPLs? Evidence from the Euro Area," CSEF Working Papers 513, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 02 May 2019.
    16. repec:eee:finsta:v:39:y:2018:i:c:p:79-89 is not listed on IDEAS
    17. repec:eee:finsta:v:32:y:2017:i:c:p:115-123 is not listed on IDEAS
    18. Jokivuolle, Esa & Tunaru, Radu & Vioto, Davide, 2018. "Testing the systemic risk differences in banks," Research Discussion Papers 13/2018, Bank of Finland.

    More about this item

    Keywords

    stress test; bank capital; event study;

    JEL classification:

    • 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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