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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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    File URL: https://doi.org/10.1111/j.1468-036X.2013.12020.x
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