Banking stress test effects on returns and risks

We investigate the effects of the announcement and the disclosure of the clarification, methodology, and outcomes of the U.S. banking stress tests on banks’ equity prices, credit risk, systematic risk, and systemic risk. We find evidence that stress tests have moved stock and credit markets following the disclosure of stress test results. We also find that banks’ systematic risk, as measured by betas, declined in nearly all years after the publication of stress test results. Our evidence suggests that stress tests affect systemic risk.