Are credit default swaps a sideshow? Evidence that Information Flows from Equity to CDS Markets
AbstractThis paper provides evidence that equity returns lead credit protection returns at daily and weekly frequencies, while credit protection returns do not lead equity returns. Our results indicate that informed traders are primarily active in the equity rather than the CDS market. These ?ndings are consistent with standard theories of market selection by informed traders in which market selection is deter- mined partially by transaction costs. We also ?nd that credit protection returns respond more quickly during salient news events (earnings announcements) com- pared to days with similar equity returns and turnover. This evidence provides support for explanations related to investor inattention.
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Bibliographic InfoPaper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 35.
Length: 54 pages
Date of creation: Jul 2011
Date of revision: Oct 2012
CDS; Market Segmentation; Inattention;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-05 (All new papers)
- NEP-FMK-2011-09-05 (Financial Markets)
- NEP-URE-2011-09-05 (Urban & Real Estate Economics)
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