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Are credit default swaps a sideshow? Evidence that Information Flows from Equity to CDS Markets

Author

Listed:
  • Jens Hilscher

    (International Business School, Brandeis University)

  • Joshua M. Pollet

    (Broad College of Business, Michigan State University)

  • Mungo Wilson

    (Saïd Business School, Oxford University)

Abstract

This paper provides evidence that equity returns lead credit protection returns at daily and weekly frequencies, while credit protection returns do not lead equity returns. Our results indicate that informed traders are primarily active in the equity rather than the CDS market. These ?ndings are consistent with standard theories of market selection by informed traders in which market selection is deter- mined partially by transaction costs. We also ?nd that credit protection returns respond more quickly during salient news events (earnings announcements) com- pared to days with similar equity returns and turnover. This evidence provides support for explanations related to investor inattention.

Suggested Citation

  • Jens Hilscher & Joshua M. Pollet & Mungo Wilson, 2011. "Are credit default swaps a sideshow? Evidence that Information Flows from Equity to CDS Markets," Working Papers 35, Brandeis University, Department of Economics and International Business School, revised May 2013.
    • Handle: RePEc:brd:wpaper:35
    as

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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP35.pdf
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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP35R.pdf
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    File URL: http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP35R2.pdf
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    References listed on IDEAS

    as
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    6. Ericsson, Jan & Jacobs, Kris & Oviedo, Rodolfo, 2009. "The Determinants of Credit Default Swap Premia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(1), pages 109-132, February.
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    More about this item

    Keywords

    CDS; Market Segmentation; Inattention;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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    This paper has been announced in the following NEP Reports:

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