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Explaining co-movements between equity and CDS bid-ask spreads

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  • Miriam Marra

    (University of Reading)

Abstract

In this paper I show that the co-movements between bid-ask spreads of equities and credit default swaps vary over time and increase over crisis periods. The co-movements are strongly related to systematic risk factors and to the theoretical debt-to-equity hedge ratio. I document that hedging and asymmetric information, besides higher funding costs and market volatility risk, are driving factors of the commonality and are significantly priced in CDS bid-ask spreads.

Suggested Citation

  • Miriam Marra, 2017. "Explaining co-movements between equity and CDS bid-ask spreads," Review of Quantitative Finance and Accounting, Springer, vol. 49(3), pages 811-853, October.
    • Handle: RePEc:kap:rqfnac:v:49:y:2017:i:3:d:10.1007_s11156-016-0609-6
    DOI: 10.1007/s11156-016-0609-6
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    2. Marra, Miriam & Yu, Fan & Zhu, Lu, 2019. "The impact of trade reporting and central clearing on CDS price informativeness," Journal of Financial Stability, Elsevier, vol. 43(C), pages 130-145.

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    More about this item

    Keywords

    Credit default swap; Bid-ask spread co-movement; Funding costs; Systematic risk; Hedging; Capital structure arbitrage;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • 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
    • G19 - Financial Economics - - General Financial Markets - - - Other

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