ScienceDirect Publication: Journal of Empirical Finance
Tue, 04 Feb 2020 12:00:51 GMT language
Publication date: Available online 3 February 2020
Source: Journal of Empirical Finance
Author(s): Fausto Pacicco, Luigi Vena, Andrea Venegoni
The impact of authorities’ information disclosure on social welfare and market stability has become a widely debated topic since the contribution of Morris and Shin (2002). Despite several theoretical works, this strand of literature remains void of empirical contributions. By assessing how disclosure of stress test results influences market risk perception, we provide factual evidence on how authorities’ enhanced communication affects financial markets’ stability. Our results provide empirical evidence to support Faria-e-Castro et al.’s (2017) theoretical findings, demonstrating that severe stress tests, if enacted in countries with credible fiscal capacity such as the U.S., can lead agents to revise their risk estimations downwards for all banks, notwithstanding their performance in the exercise.