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 as measures for economy-wide informational asymmetries over time.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 6/2012.
Length: 41 pages
Date of creation: 02 Feb 2012
Date of revision:
credit default swaps; price discovery; informational efficiency; hedging demand;
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.
- 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.
- 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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