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Market integration and efficiency of CDS and equity markets

Author

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  • Kiesel, F.
  • Kolaric, S.
  • Schiereck, D.

Abstract

We test the market integration and efficiency of credit default swap (CDS) and equity markets by examining the CDS spreads of 538 US and European firms around unanticipated and sudden credit events (CEs) from 2010 to 2013. We find evidence that stock markets react prior to CDS markets, anticipating CEs to a certain extent. In particular, we find that equity returns during the two days prior to a CE have a highly significant influence on the observed CDS spread change on the day of the CE, indicating that both markets are not fully integrated yet. In addition, we find evidence that CDS spread changes display continuation patterns following positive CEs and reversal patterns following negative CEs. These patterns are in line with the Uncertain Information Hypothesis, suggesting that CDS markets are efficient, albeit lagging equity markets to a certain extent.

Suggested Citation

  • Kiesel, F. & Kolaric, S. & Schiereck, D., 2016. "Market integration and efficiency of CDS and equity markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 77819, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:77819
    DOI: 10.1016/j.qref.2016.02.010
    Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/77819/
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    Cited by:

    1. van Zundert, Jeroen & Driessen, Joost, 2022. "Stocks versus corporate bonds: A cross-sectional puzzle," Journal of Banking & Finance, Elsevier, vol. 137(C).
    2. Bouri, Elie & Vo, Xuan Vinh & Saeed, Tareq, 2021. "Return equicorrelation in the cryptocurrency market: Analysis and determinants," Finance Research Letters, Elsevier, vol. 38(C).
    3. Sensoy, Ahmet & Fabozzi, Frank J. & Eraslan, Veysel, 2017. "Predictability dynamics of emerging sovereign CDS markets," Economics Letters, Elsevier, vol. 161(C), pages 5-9.
    4. 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).
    5. 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).
    6. Elie Bouri & Tsangyao Chang & Rangan Gupta, 2016. "Testing the Efficiency of the Wine Market using Unit Root Tests with Sharp and Smooth Breaks," Working Papers 201664, University of Pretoria, Department of Economics.
    7. Alena Audzeyeva & Xu Wang, 2023. "Fundamentals, real-time uncertainty and CDS index spreads," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 1-33, July.
    8. 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.
    9. 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.
    10. Florian Kiesel & Sascha Kolaric, 2018. "Measuring the effect of watch-preceded and direct rating changes: a note on credit markets," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 653-672, February.
    11. 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.
    12. Kiesel, F. & Kolaric, S., 2018. "Measuring the effect of watch-preceded and direct rating changes: a note on credit markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 87386, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    13. Hachenberg, Britta & Kiesel, Florian & Kolaric, Sascha & Schiereck, Dirk, 2017. "The impact of expected regulatory changes: The case of banks following the 2016U.S. election," Finance Research Letters, Elsevier, vol. 22(C), pages 268-273.
    14. Fuertes, Ana-Maria & Robles, Maria-Dolores, 2021. "Bank credit risk events and peers' equity value," International Review of Financial Analysis, Elsevier, vol. 75(C).
    15. Hachmi Ben Ameur & Zied Ftiti & Eric Le Fur, 2024. "What can we learn from the analysis of the fine wines market efficiency?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 703-718, January.

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