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The Value of Information: The Impact of European Union Bank Stress Tests on Stock Markets

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Abstract

We tested whether the 2010, 2011 and 2014 European Union bank stress tests produced useful and real information to the market. Using an augmented capital asset pricing model, we analyzed the impact of the information disclosures on each stress test (announcement, methodology and results events) on the stock market returns and risk of banks. Our approach allows an integrated analysis, as a sample of 41 banks that participated in all three stress tests was used. The most significant event was the methodology disclosure, in terms of its impact on risk and returns. In contrast, the results events did not have much impact in the stock market when considering the entire sample of banks. On the other hand, after dividing the sample of banks into two groups (those that passed the 2014 European Union stress test vs. those that failed), we observed a significant reaction of the stock markets in both groups. These findings are consistent with the hypothesis that stress tests provide real and valuable information to the markets about the banking system. A significant part of that information is conveyed by announcement and methodology events.

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Notes

  1. The sample includes 41 banks: Allied Irish Banks plc, Alpha Bank SA, Bank of Cyprus Public Company Ltd., Bank of Valetta plc, Bankinter SA, Barclays plc, Banco Bilbao Vizcaya Argentaria SA, Banco Comercial Português SA, BNP Paribas, Banco BPI SA, Commerzbank AG, Groupe Crédit Agricole, Danske Bank, Deutsche Bank AG, Dexia NV, Erste Goup Bank AG, Eurobank Ergasias SA, HSBC Holdings plc, ING Bank NV, Intensa SanPaolo S.p.A., Jyske Bank, KBC Group NV, Lloyds Banking Group plc, Banca Monte dei Paschi di Siena S.p.A., National Bank of Greece SA, Nordea Banck AB, OTP Bank Ltd., Piraeus Bank, SA, PKO Bank Polski, Banco Popolare – Società Cooperativa, Banco Popular Español SA, Royal Bank of Scotland plc, Banco de Sabadell SA, Banco Santander SA, Svenska Handelsbanken AB, Société Générale, Skandinaviska Enskilda Banken AB, Swedbank AB, Sydbank, UBI and Unicredit S.p.A..

  2. The banks included in our sample, that failed the 2014 EU stress test, were: Bank of Cyprus Public Company Ltd., Banco Comercial Português SA, Dexia NV, Eurobank Ergasias SA, Banca Monte dei Paschi di Siena S.p.A., National Bank of Greece SA, Piraeus Bank SA and Banco Popolare – Società Cooperativa.

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Acknowledgements

The authors thank an anonymous referee and several participants in the 86th International Atlantic Economic Conference, held in October 2018, in New York, for useful comments.

Funding

UECE and CEsA are financially suported by FCT (Fundação para a Ciência e a Tecnologia), Portugal. This article was financially supported by FCT, under the projects UID/ECO/00436/2019 and UID/SOC/04521/2019..

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Correspondence to Maria Rosa Borges.

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Borges, M.R., Mendes, J.Z. & Pereira, A. The Value of Information: The Impact of European Union Bank Stress Tests on Stock Markets. Int Adv Econ Res 25, 429–444 (2019). https://doi.org/10.1007/s11294-019-09760-5

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  • DOI: https://doi.org/10.1007/s11294-019-09760-5

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