The stock market frequently goes up immediately after a major bank fails.
March 31, 2026
Original Paper
The Relief Rally: A Ninety-Year Event Study of Positive,Market Reactions to U.S. Bank Failures
SSRN · 6495000
The Takeaway
Analyzing 90 years of data, the paper identifies a 'relief rally' phenomenon where the Dow Jones and S&P 500 often show positive abnormal returns following a bank failure. This happens because the failure removes market uncertainty and triggers expectations of government intervention.
From the abstract
This paper examines equity market reactions to U.S. bank failures from 1934 to 2024, analyzing the Dow Jones Industrial Average and S&P 500 using event study methodologies. Drawing on foundational theories from Diamond-Dybvig (bank runs), Mishkin (financial instability), and behavioral finance insights, including Shiller's feedback loops, we explore direct effects and contagion risks. Our long-term analysis reveals that, historically, periods surrounding bank failure announcements show coun