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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 Businesss 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
    1. Roberto Blanco & Simon Brennan & Ian W Marsh, 2004. "An empirical analysis of the dynamic relationship between investment-grade bonds and credit default swaps," Bank of England working papers 211, Bank of England.
    2. 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(01), pages 109-132, February.
    3. Song Han & Hao Zhou, 2016. "Effects of Liquidity on the Non-Default Component of Corporate Yield Spreads: Evidence from Intraday Transactions Data," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 1-49, September.
    4. Muravyev, Dmitriy & Pearson, Neil D. & Paul Broussard, John, 2013. "Is there price discovery in equity options?," Journal of Financial Economics, Elsevier, vol. 107(2), pages 259-283.
    5. David Easley & Maureen O'Hara & P.S. Srinivas, 1998. "Option Volume and Stock Prices: Evidence on Where Informed Traders Trade," Journal of Finance, American Finance Association, vol. 53(2), pages 431-465, April.
    6. John Geanakoplos, 2009. "The Leverage Cycle," Cowles Foundation Discussion Papers 1715, Cowles Foundation for Research in Economics, Yale University.
    7. Lauren Cohen & Andrea Frazzini, 2008. "Economic Links and Predictable Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1977-2011, August.
    8. Terrence Hendershott & Charles M. Jones & Albert J. Menkveld, 2011. "Does Algorithmic Trading Improve Liquidity?," Journal of Finance, American Finance Association, vol. 66(1), pages 1-33, February.
    9. Kwan, Simon H., 1996. "Firm-specific information and the correlation between individual stocks and bonds," Journal of Financial Economics, Elsevier, vol. 40(1), pages 63-80, January.
    10. Owen Lamont & Andrea Frazzini, 2007. "The Earnings Announcement Premium and Trading Volume," NBER Working Papers 13090, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. van Zundert, Jeroen, 2018. "Empirical studies on the cross-section of corporate bond and stock markets," Other publications TiSEM 338205fc-a031-4e06-a636-9, Tilburg University, School of Economics and Management.
    2. Miguel Antón & Sergio Mayordomo & María Rodríguez-Moreno, "undated". "Dealing with dealers: sovereign CDS comovements," Working Papers 1723, Banco de España;Working Papers Homepage.
    3. repec:kap:rqfnac:v:49:y:2017:i:3:d:10.1007_s11156-016-0609-6 is not listed on IDEAS
    4. Paulo Pereira da Silva, 2016. "Did Investors Seeking Short Exposure Move to the CDS Market after the 2011 Short-Sale Bans in European Financial Stocks?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(4), pages 322-353, August.
    5. repec:eee:intfin:v:51:y:2017:i:c:p:39-57 is not listed on IDEAS
    6. Blumenstock, Hendrik & von Grone, Udo & Mehlhorn, Marc & Merkl, Johannes & Pietz, Marcus, 2012. "Einflussfaktoren von CDS-Spreads als Maß für das aktuelle Bonitätsrisiko: Liefert das Rating eine Erklärung?," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2012-03, University of Bayreuth, Chair of Finance and Banking.
    7. Morrison, Alan & Vasios, Michalis & Wilson, Mungo & Zikes, Filip, 2017. "Identifying contagion in a banking network," Bank of England working papers 642, Bank of England.
    8. repec:eee:jbfina:v:90:y:2018:i:c:p:96-112 is not listed on IDEAS
    9. Bai, Xuelian & Hu, Nan & Liu, Ling & Zhu, Lu, 2017. "Credit derivatives and stock return synchronicity," Journal of Financial Stability, Elsevier, vol. 28(C), pages 79-90.
    10. repec:eee:finmar:v:35:y:2017:i:c:p:21-46 is not listed on IDEAS
    11. repec:eee:finana:v:55:y:2018:i:c:p:156-169 is not listed on IDEAS
    12. repec:bla:jrinsu:v:84:y:2017:i:4:p:1295-1330 is not listed on IDEAS
    13. Tang, Dragon Yongjun & Yan, Hong, 2017. "Understanding transactions prices in the credit default swaps market," Journal of Financial Markets, Elsevier, vol. 32(C), pages 1-27.
    14. Kizys, Renatas & Paltalidis, Nikos & Vergos, Konstantinos, 2016. "The quest for banking stability in the euro area: The role of government interventions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 111-133.
    15. Hilscher, Jens & Şişli-Ciamarra, Elif, 2013. "Conflicts of interest on corporate boards: The effect of creditor-directors on acquisitions," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 140-158.
    16. repec:eee:ecmode:v:64:y:2017:i:c:p:48-59 is not listed on IDEAS
    17. Han, Bing & Subrahmanyam, Avanidhar & Zhou, Yi, 2017. "The term structure of credit spreads, firm fundamentals, and expected stock returns," Journal of Financial Economics, Elsevier, vol. 124(1), pages 147-171.

    More about this item

    Keywords

    CDS; Market Segmentation; Inattention;

    JEL classification:

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

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