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Evaluating the information in the Federal Reserve stress tests

Mark Flannery, Beverly Hirtle and Anna Kovner

No 744, Staff Reports from 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.

Keywords: bank capital; stress test; event study (search for similar items in EconPapers)
JEL-codes: G21 G28 G14 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2015-10-01, Revised 2016-03-01
New Economics Papers: this item is included in nep-cba, nep-cfn and nep-mon
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