An analysis of stock market reactions to regulatory stress tests in the US banking industry

After the financial crisis, the Fed Reserve enacted the Dodd-Frank Act to maintain the sound and safety of the banking industry as well. Two related supervisory stress testing: Comprehensive Capital Analysis and Review and Dodd-Frank Act Stress test were conducted in banking holding companies annually to supervise the banking industry. Two methods, event study and cross-sectional regression are utilized to analyze the reaction of banks’ equity price to the U.S. stress testing during the period of 2013-2016. The objective of this paper are to consider the importance of the impact of U.S. stress test to the banks, recognize whether the banks would be influenced by stress testing and compare the effect of stress tests to the stressed banks and non-stressed banks. The paper finds that the stress testing influences stressed banks, and non-stressed banks as well. However, little evidence shows that the stock market is complete transparency or complete opacity