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Insider Trading in Credit Derivatives

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Author Info
Acharya, Viral V
Johnson, Tim

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Abstract

Insider trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we report evidence of significant incremental information revelation in the credit default swap (CDS) market, consistent with the occurrence of insider trading. We show that the degree of this activity increases with the number of banks that have lending/monitoring relations with a given firm, and that this effect is robust to controls for non-informational trade. Furthermore, consistent with hedging activity by informed banks with loan exposure, information revelation in the CDS market is asymmetric, consisting exclusively of bad news. We find no evidence, however, that the degree of insider activity adversely affects prices or liquidity in either the equity or credit markets. If anything, with regard to liquidity, the reverse appears to be true.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5180.

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Date of creation: Aug 2005
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Handle: RePEc:cpr:ceprdp:5180

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Related research
Keywords: adverse selection; asset pricing; bank relationship; credit default swaps; default;

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Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G20 - Financial Economics - - Financial Institutions and Services - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  5. Michael J. Fleming, 2001. "Measuring treasury market liquidity," Staff Reports 133, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  6. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March. [Downloadable!] (restricted)
    Other versions:
  7. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June. [Downloadable!] (restricted)
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  14. Bloomfield, Robert & O'Hara, Maureen, 1999. "Market Transparency: Who Wins and Who Loses?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(1), pages 5-35.
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  21. Holden, Craig W & Subrahmanyam, Avanidhar, 1992. " Long-Lived Private Information and Imperfect Competition," Journal of Finance, American Finance Association, vol. 47(1), pages 247-70, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Scheicher, Martin & Raunig, Burkhard, 2008. "A value at risk analysis of credit default swaps," Discussion Paper Series 2: Banking and Financial Studies 2008,12, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. James R. Thompson, 2007. "Credit Risk Transfer: To Sell or to Insure," Working Papers 1131, Queen's University, Department of Economics. [Downloadable!]
  3. René M. Stulz, 2009. "Credit Default Swaps and the Credit Crisis," NBER Working Papers 15384, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Minton, Bernadette & Stulz, Rene & Williamson, Rohan, 2008. "How Much Do Banks Use Credit Derivatives to Hedge Loans?," Working Paper Series 2008-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  5. Yalin Gündüz & Torsten Lüdecke & Marliese Uhrig-Homburg, 2007. "Trading Credit Default Swaps via Interdealer Brokers," Journal of Financial Services Research, Springer, vol. 32(3), pages 141-159, December. [Downloadable!] (restricted)
  6. Bodnaruk, Andriy & Massa, Massimo & Simonov, Andrei, 2008. "Investment Banks as Insiders and the Market for Corporate Control," CEPR Discussion Papers 6953, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Antonio Nicolo’ & Loriana Pelizzon, 2006. "Credit Derivatives, Capital Requirements and Opaque OTC Markets," Working Papers 2006_58, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
    Other versions:
  8. Norden, L. & Wagner, W.B., 2007. "Credit Derivatives and Loan Pricing," Discussion Paper 2007-015, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
    Other versions:
  9. Adam B. Ashcraft & João A. C. Santos, 2007. "Has the credit derivatives swap market lowered the cost of corporate debt?," Staff Reports 290, Federal Reserve Bank of New York. [Downloadable!]
  10. Kwamie Dunbar, 2007. "US Corporate Default Swap Valuation: The Market Liquidity Hypothesis and Autonomous Credit Risk," Working papers 2007-08, University of Connecticut, Department of Economics. [Downloadable!]
    Other versions:
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