The Impact of Regulatory Stress Testing on Bank's Equity and CDS Performance
Type
journal article
Date Issued
2018-05-17
Author(s)
Abstract (De)
Abstract
This paper investigates the impact of stress testing results on bank's equity and CDS performance using a large sample of ten tests from the US CCAR and the European EBA regimes in the time period between 2010 and 2017. We find that passing banks experience positive abnormal equity returns and tighter CDS spreads, while failing banks show strong drops in equity prices and widening CDS spreads. Interestingly, we also document strong market reactions at the announcement date of the stress tests. A bank’s asset quality and its return on equity at the time of the announcement are significant predictors of the pass/fail outcome of a bank.
This paper investigates the impact of stress testing results on bank's equity and CDS performance using a large sample of ten tests from the US CCAR and the European EBA regimes in the time period between 2010 and 2017. We find that passing banks experience positive abnormal equity returns and tighter CDS spreads, while failing banks show strong drops in equity prices and widening CDS spreads. Interestingly, we also document strong market reactions at the announcement date of the stress tests. A bank’s asset quality and its return on equity at the time of the announcement are significant predictors of the pass/fail outcome of a bank.
Language
English
Keywords
Banks
Stress Testing
Equity Performance
CDS Performance
HSG Classification
contribution to scientific community
HSG Profile Area
SOF - System-wide Risk in the Financial System
Refereed
No
Publisher
SoF-HSG
Pages
36
Subject(s)
Eprints ID
254307
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18_14_Weigert et al_The Impact of Regulatory Stress Testing on Bank's Equity and CDs Performance.pdf
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936.24 KB
Format
Adobe PDF
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