Stressing Bank's Asset Variance: The Impact of the 2014 Comprehensive Assessment on the CDS-Stock Relationship

28 Pages Posted: 20 Feb 2016 Last revised: 25 Feb 2016

See all articles by Giovanni Covi

Giovanni Covi

European Central Bank (ECB); University of Verona

Guiseppe Ambrosini

University of Milan

Date Written: February 18, 2016

Abstract

This paper examines the impact of the ECB's 2014 Comprehensive Assessment on the correlation between stock returns and credit default swap spreads (CDS). Specifically, an event study methodology and a panel data analysis are performed on a sample of forty banks assessed by the ECB. The main finding is that, in the weeks following the results announcement of the Stress Test on October 2014, the negative relationship between CDS and stocks broke down. It is argued that stocks and CDS movements were driven by bank-specific information predominantly related to the variance, rather than the mean, of the banks' underlying assets. To this respect the credibility, accuracy and effectiveness of the comprehensive assessment, together with the change in the degree of executive power of the ECB, may have reduced information asymmetries and consequently enhanced banks' accountability and transparency without damaging the value of the banks under examination.

Keywords: Stock-CDS Relationship, Informational Efficiency, Stress Test, ECB

JEL Classification: G12; G14; G18

Suggested Citation

Covi, Giovanni and Ambrosini, Guiseppe, Stressing Bank's Asset Variance: The Impact of the 2014 Comprehensive Assessment on the CDS-Stock Relationship (February 18, 2016). Available at SSRN: https://ssrn.com/abstract=2735169 or http://dx.doi.org/10.2139/ssrn.2735169

Giovanni Covi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

University of Verona ( email )

Via dell'Artigliere, 8
Verona, 37129
Italy

Guiseppe Ambrosini

University of Milan ( email )

Via Festa del Perdono, 7
Milan, 20122
Italy

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