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The extent of informational efficiency in the credit default swap market: evidence from post-earnings announcement returns

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  • Nicole Thorne Jenkins

    () (University of Kentucky)

  • Michael D. Kimbrough

    () (University of Maryland)

  • Juan Wang

    () (Central Connecticut State University)

Abstract

Abstract Under semi-strong market efficiency future returns are unpredictable from previously released information. We test the degree of semi-strong form market efficiency in the credit default swap (CDS) market by examining the relationship between subsequent CDS returns and previously announced quarterly earnings surprises and quarterly accruals, both of which have been the source of stock market anomalies. We conduct our analysis over three time periods: (1) before the credit crisis that spanned from July 2007 to June 2009, (2) during the credit crisis, and (3) after the credit crisis. Both before and after the credit crisis, the CDS market was efficient, exhibiting no systematic relation between subsequent CDS returns and previously announced accounting information. During the credit crisis, however, we find that both quarterly earnings surprises and quarterly accruals are associated with systematic patterns in subsequent CDS returns that are consistent with underreaction to both measures. In the latter stages of the crisis, the pattern reverses, consistent with the CDS market overreacting to both measures although the overreaction is short-lived. Collectively, our results indicate that the CDS market is efficient during periods of relative economic stability but call into question its efficiency during less stable economic periods.

Suggested Citation

  • Nicole Thorne Jenkins & Michael D. Kimbrough & Juan Wang, 2016. "The extent of informational efficiency in the credit default swap market: evidence from post-earnings announcement returns," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 725-761, May.
  • Handle: RePEc:kap:rqfnac:v:46:y:2016:i:4:d:10.1007_s11156-014-0484-y DOI: 10.1007/s11156-014-0484-y
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    References listed on IDEAS

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    Cited by:

    1. Shahzad, Syed Jawad Hussain & Nor, Safwan Mohd & Mensi, Walid & Kumar, Ronald Ravinesh, 2017. "Examining the efficiency and interdependence of US credit and stock markets through MF-DFA and MF-DXA approaches," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 471(C), pages 351-363.
    2. repec:eee:ecolet:v:161:y:2017:i:c:p:5-9 is not listed on IDEAS

    More about this item

    Keywords

    Credit default swaps; Market efficiency; Default risk; Post earnings announcement drift; Accrual anomaly;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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