The Relative Informational Efficiency of Stocks, Options and Credit Default Swaps
AbstractIn this study, we investigate the dynamics behind informed investors’ trading decisions among European stock, options and credit default swap markets. This allows us to identify the predictive explanatory power of the unique information contained in each market with respect to future stock, CDS and option market movements. A lead-lag relation is found between the options and CDS market in which changes in equity options’ implied volatility are able to consistently forecast changes in CDS spreads pointing out how the option market seems to play a special role in the price discovery process even in the presence of a very fast growing competitive market like the CDS market. Moreover, in contrast to US results, the stock market is found to forecast changes in the other two markets suggesting that investors first prefer stock market involvement to exploit their information advantages and then move to CDS and option markets. Although this is the case, the CDS market seems to gain importance in the price discovery process as firms’ become more risky.
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Bibliographic InfoPaper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 11-04.
Date of creation: 2011
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Credit default swap spread; option-implied volatility; lead-lag relationship; price discovery; informed trading.;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-05-30 (All new papers)
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