School of Economics and Finance

No. 771: March Madness in Wall Street: (What) Does the Market Learn from Stress Tests?

Marcelo Fernandes , Queen Mary University of London and Sao Paulo School of Economics, FGV
Deniz Igan ,
Marcelo Pinheiro , PCAOB

December 20, 2015

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Annual stress tests have become a regular part of the supervisors' toolkit following the global financial crisis. We investigate their capital market implications in the United States by looking at price and trade reactions, information asymmetry and uncertainty indicators, and bank activities. The evidence we present supports the notion that there is important new information in stress tests, especially at times of financial distress. Moreover, public disclosure seem to help reduce informational asymmetries. Importantly, public disclosure of stress test results (and methodology) does not seem to have reduced private incentives to generate information or to have led to distorted incentives.

J.E.L classification codes: G14, G28, G32

Keywords:Stress testing, Capital requirements, Public disclosure, Information