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Time†Varying Credit Risk Discovery in the Stock and CDS Markets: Evidence from Quiet and Crisis Times

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  • Santiago Forte
  • Lidija Lovreta

Abstract

We analyse the dynamic relationship between the stock and the CDS market during the period 2002–2008. We document that the stock market's informational dominance reported in previous studies holds only in times of financial crisis. During tranquil times, the CDS market's contribution to price discovery is equal or higher than that of the stock market. Moreover, the credit risk level of the company has a positive effect on the information share of its stocks beyond the effect of the overall state of the economy. We show that these conclusions do not contradict the argument of insider trading in credit derivatives.

Suggested Citation

  • Santiago Forte & Lidija Lovreta, 2015. "Time†Varying Credit Risk Discovery in the Stock and CDS Markets: Evidence from Quiet and Crisis Times," European Financial Management, European Financial Management Association, vol. 21(3), pages 430-461, June.
    • Handle: RePEc:bla:eufman:v:21:y:2015:i:3:p:430-461
    DOI: 10.1111/j.1468-036X.2013.12020.x
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    4. Chau, Frankie & Han, Chulwoo & Shi, Shimeng, 2018. "Dynamics and determinants of credit risk discovery: Evidence from CDS and stock markets," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 156-169.
    5. Tolikas, Konstantinos & Topaloglou, Nikolas, 2017. "Is default risk priced equally fast in the credit default swap and the stock markets? AN empirical investigation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 39-57.
    6. Corbet, Shaen & Cumming, Douglas J. & Hou, Yang (Greg) & Hu, Yang & Oxley, Les, 2022. "Have crisis-induced banking supports influenced European bank performance, resilience and price discovery?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).

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