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Information in CDS spreads

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  • Norden, Lars

Abstract

We investigate how public and private information affects corporate CDS spreads prior to rating announcements. First, CDS spreads of firms with high news intensity change significantly earlier and more strongly prior to negative rating announcements than those of firms with low news intensity. Second, the contents of daily corporate news significantly influence the direction in which the CDS spreads move. Third, CDS spreads change more strongly for firms with more bank relationships and days with no news but large abnormal CDS spread changes are more frequent prior to negative rating announcements than prior to positive ones. The study provides new evidence on the informational efficiency of the CDS market, the impact of credit rating announcements, and insider trading.

Suggested Citation

  • Norden, Lars, 2017. "Information in CDS spreads," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 118-135.
    • Handle: RePEc:eee:jbfina:v:75:y:2017:i:c:p:118-135
    DOI: 10.1016/j.jbankfin.2016.11.007
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    Cited by:

    1. Benjamin Hippert & André Uhde & Sascha Tobias Wengerek, 2019. "Portfolio benefits of adding corporate credit default swap indices: evidence from North America and Europe," Review of Derivatives Research, Springer, vol. 22(2), pages 203-259, July.
    2. Dai, Jing & Hu, Nan & Huang, Rong & Yan, Yan, 2023. "How does credit risk affect cost management strategies? Evidence on the initiation of credit default swap and sticky cost behavior," Journal of Corporate Finance, Elsevier, vol. 80(C).
    3. Andres, Christian & Betzer, André & Doumet, Markus, 2021. "Measuring changes in credit risk: The case of CDS event studies," Global Finance Journal, Elsevier, vol. 49(C).
    4. Flore, Christian & Degryse, Hans & Kolaric, Sascha & Schiereck, Dirk, 2021. "Forgive me all my sins: How penalties imposed on banks travel through markets," Journal of Corporate Finance, Elsevier, vol. 68(C).
    5. Kiesel, Florian & Kolaric, Sascha & Norden, Lars & Schiereck, Dirk, 2021. "To change or not to change? The CDS market response of firms on credit watch," Journal of Banking & Finance, Elsevier, vol. 125(C).
    6. Omri Even-Tov & Naim Bugra Ozel, 2021. "What moves stock prices around credit rating changes?," Review of Accounting Studies, Springer, vol. 26(4), pages 1390-1427, December.
    7. Jose E. Gomez-Gonzalez & Jorge M. Uribe & Oscar M. Valencia, 2023. "Risk spillovers between global corporations and Latin American sovereigns: global factors matter," Applied Economics, Taylor & Francis Journals, vol. 55(13), pages 1477-1496, March.
    8. Silaghi, Florina & Martín-Oliver, Alfredo & Sewaid, Ahmed, 2022. "The CDS market reaction to loan renegotiation announcements," Journal of Banking & Finance, Elsevier, vol. 138(C).
    9. Florian Kiesel, 2021. "It's the tone, stupid! Soft information in credit rating reports and financial markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 553-585, September.
    10. Löffler, Gunter & Norden, Lars & Rieber, Alexander, 2021. "Negative news and the stock market impact of tone in rating reports," Journal of Banking & Finance, Elsevier, vol. 133(C).
    11. Saker Sabkha & Christian Peretti & Dorra Hmaied, 2019. "On the informational market efficiency of the worldwide sovereign credit default swaps," Journal of Asset Management, Palgrave Macmillan, vol. 20(7), pages 581-608, December.
    12. Marra, Miriam & Yu, Fan & Zhu, Lu, 2019. "The impact of trade reporting and central clearing on CDS price informativeness," Journal of Financial Stability, Elsevier, vol. 43(C), pages 130-145.
    13. Aloui, Chaker & Shahzad, Syed Jawad Hussain & Jammazi, Rania, 2018. "Dynamic efficiency of European credit sectors: A rolling-window multifractal detrended fluctuation analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 506(C), pages 337-349.
    14. Martijn Boermans & Bram van der Kroft, 2020. "Capital regulation induced reaching for systematic yield: Financial instability through fire sales," Working Papers 673, DNB.

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    More about this item

    Keywords

    Informational efficiency; Credit derivatives; Credit ratings; Insider trading; Event study;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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