Stock Markets and Stress Test Announcements: Evidence from European Banks

Abstract

This paper examines the market reaction to the European bank stress test announcement and results release events. Using event study methodology (calculating abnormal returns on a three-day period around the event dates), we find that the market reacts differently between the announcement event and the results release event. We also show that the market seems to positively overreact one day before each event, and that this positive reaction is either fully or partially reversed one day after the event. We thus conclude that researchers should consider both events when exploring the market reaction to stress-testing exercises.