On the informative value of the EU-wide stress tests and the determinants of banks’ stock return reactions

Dimitris Georgoutsos and George Moratis

MPRA Paper from University Library of Munich, Germany

Abstract: We examine the informative value of the 2016 and 2018 supervisory EU stress tests on the basis of the bank stock and CDS abnormal returns they have caused. Our conclusions are based on results from event study analysis and from regressions on the determinants of bank stocks’ abnormal returns. We conclude that the 2018 stress test has been comparatively more informative for investors but only for a sub-group of banks based on sovereign debt-ridden and non-Eurozone countries. The robustness of our results is tested by applying an exhaustive set of event study test statistics on abnormal returns generated from both single and Fama-French factor models. The equity Tier I, leverage and profitability ratios are important determinants of abnormal bank stock returns for the same group of countries as in the event study analysis. Non-linear reactions highlight the fact that investors assign varying degrees of importance on the information they get from the stress tested financial ratios. Overall, our results substantiate the claim that the recent EU stress tests have been calibrated towards revealing the weaknesses of the banking sectors of peripheral Eurozone and non-Eurozone countries.

Keywords: EBA stress tests; event study analysis; factor models; quantile regression analysis (search for similar items in EconPapers)
JEL-codes: G28 (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fmk and nep-ore
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Journal Article: On the informative value of the EU-wide stress tests and the determinants of banks’ stock return reactions (2021)
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