Informational Value and Abnormal Stock Returns: An Event Study of EU-Wide Stress Tests from 2010 to 2018

Gauer, Kolja

Abstract

Since the global financial crisis (2007-2009), supervisory stress testing has become increasingly important. Previous studies of banks’ abnormal stock returns in response to EU-wide stress test results have produced inconsistent and contradictory results, while leaving important aspects unexplored. The aim of this study was therefore to address these shortcomings. Specifically, the study examined the five EU-wide stress tests conducted between 2010 and 2018 with the objective of: (1) testing the impact of stress test results on bank stock prices, (2) analysing the relationship between stress test results and abnormal stock returns, and (3) determining how the informational value of stress test results has changed over time. The study’s original contribution to knowledge are more comprehensive insights into the informational value of EU-wide stress test results.

The study was conducted on five cross-sectional samples (n=33 to n=59) and one longitudinal sample (n=28) of banks. Data were collected using structured direct observation and analysed following a quasi-natural experimental strategy. Based on an event-study approach, (absolute) cumulative abnormal returns were determined for three event-window types to conduct research question-specific analyses.

The findings showed that EU-wide stress test results generally had a significant impact on banks’ stock prices, suggesting that they provided investors with valuable new information, in most cases. Further analysis revealed a counterintuitive U-shaped relationship between stress test results and abnormal stock returns, implying that banks with particularly positive and negative stress test results experienced disproportionately positive abnormal stock returns. The longitudinal analysis found no discernible trend in the informational value of stress test results across the five EU-wide stress tests examined.

These insights contribute to filling empirical gaps in understanding abnormal stock returns in response to EU-wide stress test results. They could therefore be used by policymakers and investors to refine their disclosure policies or to develop profitable investment strategies.

Citation

Gauer, K. Informational Value and Abnormal Stock Returns: An Event Study of EU-Wide Stress Tests from 2010 to 2018. (Thesis). Edinburgh Napier University

• Thesis Type: Thesis
• Deposit Date: Aug 21, 2023
• Publicly Available Date: Aug 21, 2023
• DOI: https://doi.org/10.17869/enu.2023.3175188
• Award Date: Jul 6, 2023