This study examines
the impact of news of the unfolding subprime crisis on bank stock returns. The
study period covered is from Mar. 2007 to Sept. 2008, covering a variety of
events such as Fed rate cuts and companies announcing huge losses and/or filing
for bankruptcy. The methodology adopted in the study is the event study
methodology. The ACAR (Average Cumulative Abnormal Return) of a sample of bank
stocks taken before and after the news are compared using the
independent-samples t-test. The results of the study indicate that there was no
consistent pattern of reaction to the news of the subprime crisis as it
unfolded, and that bank stocks may not have been affected by the subprime
crisis to the same extent as the overall market. In particular, the initial
news about the housing market bubble, in between the first Fed rate cut, and
the climax, the bankruptcy of Lehmann Brothers, all seem to have affected the
overall market much more than the banking sector stocks.
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