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Do Equity Markets Favor Credit Market News Over Options Market News?

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  • Antje Berndt
  • Anastasiya Ostrovnaya

Abstract

Both credit default swap (CDS) and options markets often experience abnormal swings prior to the announcement of negative credit news. With the exclusion of negative earnings announcements, we find that options prices reveal information about such forthcoming adverse events at least as early as do credit spreads. Prior to negative credit news being publicly disclosed, we find that the equity market does not respond to abnormal movement in options prices unless that information has also manifested itself in the CDS market. A potential explanation is that options are more likely to trade on unsubstantiated rumors than are default swaps.

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  • Antje Berndt & Anastasiya Ostrovnaya, "undated". "Do Equity Markets Favor Credit Market News Over Options Market News?," GSIA Working Papers 2007-E12, Carnegie Mellon University, Tepper School of Business.
    • Handle: RePEc:cmu:gsiawp:1175522776
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