Why is Price Discovery in Credit Default Swap Markets News-Specific?
AbstractWe 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 CDS-lag 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 news-specific 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 news-specificity 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 Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 12-033/IV/DSF33.
Date of creation: 02 Apr 2012
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price discovery; hedging demand; CDS markets; equity markets;
Other versions of this item:
- Marsch, I. & Wagner, W.B., 2012. "Why is Price Discovery in Credit Default Swap Markets News-Specific?," Discussion Paper 2012-006, Tilburg University, Center for Economic Research.
- 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.
- 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
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