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Do Stress Tests Matter? A Study on the Impact of the Disclosure of Stress Test Results on European Financial Stocks and CDS Markets
Abstract and Figures
During the recent sovereign debt crisis, the European Banking Authority
conducted two stress tests on European banks in order to gauge their
capital needs, core Tier-1 ratios and ratios of resilience to adverse shocks.
We assess the informational content of the disclosure of the stress test
outcomes. We conclude that the stress tests conveyed new information
and that the outcomes were not anticipated by the stock market but were
partially anticipated by the CDS market. However, while the stock market
reacted to the disclosure of the stress test outcomes, in the CDS market
there is some evidence of a ‘reverse’ reaction. Moreover, the publication
of the outcomes of the stress tests had a stronger impact in the stock
prices of riskier financial institutions. A similar pattern is evident in the CDS
market, albeit narrowed to one of the stress tests and amid the financial
institutions with higher perceived credit risk.
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... Although the market anticipated on its own which banks would have capital gaps before the stress test results were disclosed, banks with larger (compared to market expectations) capital gaps experienced higher negative abnormal returns. More recently, Alves et al. (2013) reports a significant impact of the disclosure of the 2010 and 2011 stress test (on European banks) outcomes on stock prices. In particular, the stocks of banks that clearly pass the tests exhibit higher CAR than other financial stocks. ...
During the recent sovereign debt crisis, the European Banking Authority conducted two stress tests on European banks in order to gauge their capital needs, core Tier-1 ratios and ratios of resilience to adverse shocks. We assess the informational content of the disclosure of the stress test outcomes. We conclude that the stress tests conveyed new information and that the outcomes were not anticipated by the stock market but were partially anticipated by the credit default swap (CDS) market. However, while the stock market reacted to the disclosure of the stress test outcomes, in the CDS market there is some evidence of a ‘reverse’ reaction. Moreover, the publication of the outcomes of the stress tests had a stronger impact on the stock prices of riskier financial institutions. A similar pattern is evident in the CDS market, albeit narrowed to one of the stress tests and amid the financial institutions with higher perceived credit risk.
This study investigates the empirical influence of financial stress on
equity premium in the case of United States by using the wavelet transform
framework. This new methodology enables the decomposition of timeseries
at different time-frequencies. Generally, empirical results show
strong evidence of significant linkage between financial stress on the stock
markets. These findings confirm that financial stress is majority having the
influence over equity premium in short run, but also for both medium and
large time horizons.
The pattern of disagreement between bond raters suggests that banks and insurance firms are inherently more opaque than other types of firms. Moody's and S&P split more often over these financial intermediaries, and the splits are more lopsided, as theory here predicts. Uncertainty over the banks stems from certain assets, loans and trading assets in particular, the risks of which are hard to observe or easy to change. Banks' high leverage, which invites agency problems, compounds the uncertainty over their assets. These findings bear on both the existence and reform of hank regulation. (JEL G20, G21, G28).
We investigate whether announcements of ‘subject to’ audit opinions and disclaimers of opinions affect stock prices. The results indicate that many firms experience negative abnormal performance prior to the release of qualified opinions, and that the magnitude of prior abnormal performance differs across types of qualifications. However, there is little evidence of a stock price effect when qualifications are disclosed publicly. It is difficult to construct powerful tests of the announcement effect of a qualified opinion for three reasons. First, the announcement date of the qualification is not easily identified. Second, measuring the unanticipated component of the announcement requires a model of market expectations. Third, controls must be employed for concurrent disclosures. The problems concerning event date identification have ramifications for other accounting event studies, particularly studies of disclosures typically contained in the annual report or 10-K.
This paper examines the efficiency of the CDS market by conducting a comparative event study in which both the CDS and the stock markets' responses to earnings announcements are considered. I find that both markets have statistically significant reactions to earnings announcements and both markets anticipate these informational events up to 90 trading days prior to announcement. I further find that neither markets' reaction to earnings announcements is entirely efficient as there is evidence of both over- and under-reaction to earnings news. However, results are sensitive to both the categorization of earnings and the model used to generate abnormal performance.
This article examines the issue of cross-sectional correlation in event studies. When there is event-date clustering, we find that even relatively low cross-correlation among abnormal returns is serious in terms of over-rejecting the null hypothesis of zero average abnormal returns. We propose a new test statistic that modifies the t-statistic of Boehmer, Musumeci, and Poulsen (1991) to take into account cross-correlation and show that it performs well in competition with others, including the portfolio approach, which is less powerful than other alternatives under study. Also, our statistic is readily useable to test multiple-day cumulative abnormal returns. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
This article investigates the relationship between CD rates as a measure of bank risk and the confidential CAMEL scores assigned to a bank as a result of an onsite examination. CAMEL ratings determine whether a bank is placed on the problem list and expresses the examiner's belief that the bank should be subjected to enhanced surveillance. In the view of regulators, CAMEL ratings are based on inside information and hence should be confidential. The empirical results in this article suggest that CAMEL ratings are primarily proxies for available market information about the quality of a bank.