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 CDS market and the other markets, in which changes in CDS spreads are able to consistently forecast changes in stock prices and equity options implied volatilities pointing out how the fast growing CDS market seems to play a special role in the price discovery process. Moreover, in contrast to US results, the stock market is found to forecast changes in the other two markets suggesting that investors also prefer stock market involvement to exploit their information advantages and then move to CDS and option markets. Interestingly, those patterns have only emerged during the recent financial crisis, while before the crisis the option market was found to be of major importance in the price discovery process.
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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 11-13.
Date of creation: 2011
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Credit default swap spread; option-implied volatility; lead-lag relationship; price;
Other versions of this item:
- 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-2012-05-15 (All new papers)
- NEP-GEO-2012-05-15 (Economic Geography)
- NEP-MIG-2012-05-15 (Economics of Human Migration)
- NEP-PBE-2012-05-15 (Public Economics)
- NEP-PUB-2012-05-15 (Public Finance)
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