Why is Price Discovery in Credit Default Swap Markets News-Specific?
AbstractAbstract: We analyse daily lead-lag patterns in US equity and credit default swap (CDS) returns. We first document that equity returns robustly lead CDS returns. However, we find that the CDSlag is due to common (and not firm-specific) news and arises predominantly in response to positive (instead of negative) equity market news. We provide an explanation for this newsspecific price discovery based on dealers in the CDS market exploiting their informational advantage vis-à-vis institutional investors with hedging demands. In support of this explanation we find that the CDS-lag and its newsspecificity are related to various firm-level proxies for hedging demand in the cross-section as well measures for economy-wide informational asymmetries over time.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2012-006.
Date of creation: 2012
Date of revision:
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Web page: http://center.uvt.nl
price discovery; CDS; hedging demand; informational asymmetries;
Other versions of this item:
- Ian W. Marsh & Wolf Wagner, 2012. "Why is Price Discovery in Credit Default Swap Markets News-Specific?," Tinbergen Institute Discussion Papers 12-033/2/DSF33, Tinbergen Institute.
- Marsh, Ian W. & Wagner , Wolf, 2012. "Why is price discovery in credit default swap markets news-specific?," Research Discussion Papers 6/2012, Bank of Finland.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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