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Dynamics and determinants of credit risk discovery: Evidence from CDS and stock markets

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  • Chau, Frankie
  • Han, Chulwoo
  • Shi, Shimeng

Abstract

This paper investigates the dynamics and drivers of credit risk discovery between stock and CDS markets in the US. Our research is distinguished from the existing literature in three aspects: 1) we employ an improved method to measure the information share; 2) we discover new drivers of credit risk discovery; and 3) we assess the impact of central clearing counterparty (CCP) on the CDS market. By using the generalized information share (GIS) by Lien and Shrestha (2014), we address the issue that the CDS and stock prices do not have one-to-one cointegration relation. The empirical results support the use of GIS instead of more conventional measures. We also find that eliminating transitory price components increases the information share of the CDS market in the earlier period of the sample. The economic condition and funding cost turn out to affect the information share of the CDS market negatively. Another interesting finding is that the CDS of investment grade firms possess higher information shares compared to speculative grade firms. Finally, CCP seems to reduce the information share of CDS, which suggests that the CDS market is driven largely by insider trading.

Suggested Citation

  • Chau, Frankie & Han, Chulwoo & Shi, Shimeng, 2018. "Dynamics and determinants of credit risk discovery: Evidence from CDS and stock markets," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 156-169.
    • Handle: RePEc:eee:finana:v:55:y:2018:i:c:p:156-169
    DOI: 10.1016/j.irfa.2017.11.004
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    Cited by:

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    2. Lien, Donald, 2022. "Comparisons of Alternative Information Share Measures," Finance Research Letters, Elsevier, vol. 50(C).
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    4. Shrestha, Keshab & Naysary, Babak & Philip, Sheena Sara Suresh, 2023. "Price discovery in carbon exchange traded fund markets," International Review of Financial Analysis, Elsevier, vol. 89(C).
    5. Kassouri, Yacouba & Kacou, Kacou Yves Thierry, 2022. "Does the structure of credit markets affect agricultural development in West African countries?," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 588-601.
    6. Pokrivčák, Ján & Tóth, Marián, 2022. "Financing Gap of Agro-food Firms and the Role of Policies," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 14(3), September.
    7. Wang, Qunwei & Liu, Mengmeng & Xiao, Ling & Dai, Xingyu & Li, Matthew C. & Wu, Fei, 2022. "Conditional sovereign CDS in market basket risk scenario: A dynamic vine-copula analysis," International Review of Financial Analysis, Elsevier, vol. 80(C).

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    More about this item

    Keywords

    Credit risk discovery; Determinants; Generalized information share;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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