The stock market frequently goes up immediately after a major bank fails.
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.
The Relief Rally: A Ninety-Year Event Study of Positive,Market Reactions to U.S. Bank Failures
SSRN · 6495000
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