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The Credit Default Swap Market's Reaction to Earnings Announcements

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  • Caitlin Ann Greatrex

    (Fordham University, Department of Economics)

Abstract

This paper examines the efficiency of the CDS market by conducting a comparative event study in which both the CDS and the stock markets' responses to earnings announcements are considered. I find that both markets have statistically significant reactions to earnings announcements and both markets anticipate these informational events up to 90 trading days prior to announcement. I further find that neither markets' reaction to earnings announcements is entirely efficient as there is evidence of both over- and under-reaction to earnings news. However, results are sensitive to both the categorization of earnings and the model used to generate abnormal performance.

Suggested Citation

  • Caitlin Ann Greatrex, 2008. "The Credit Default Swap Market's Reaction to Earnings Announcements," Fordham Economics Discussion Paper Series dp2008-06, Fordham University, Department of Economics.
  • Handle: RePEc:frd:wpaper:dp2008-06
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    File URL: https://archive.fordham.edu/ECONOMICS_RESEARCH/PAPERS/dp2008_06_greatrex.pdf
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    References listed on IDEAS

    as
    1. Brown, Stewart L, 1978. "Earnings Changes, Stock Prices, and Market Efficiency," Journal of Finance, American Finance Association, vol. 33(1), pages 17-28, March.
    2. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    3. Bernard, Victor L. & Thomas, Jacob K., 1990. "Evidence that stock prices do not fully reflect the implications of current earnings for future earnings," Journal of Accounting and Economics, Elsevier, vol. 13(4), pages 305-340, December.
    4. 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.
    5. Norden, Lars & Weber, Martin, 2004. "Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2813-2843, November.
    6. 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.
    7. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    8. repec:wsi:ijtafx:v:09:y:2006:i:01:n:s0219024906003445 is not listed on IDEAS
    9. Victor L. Bernard & Jacob K. Thomas & Jeffery S. Abarbanell, 1993. "How Sophisticated Is The Market In Interpreting Earnings News?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(2), pages 54-63.
    10. Rendleman, Richard Jr. & Jones, Charles P. & Latane, Henry A., 1982. "Empirical anomalies based on unexpected earnings and the importance of risk adjustments," Journal of Financial Economics, Elsevier, vol. 10(3), pages 269-287, November.
    11. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
    12. Jennifer Conrad & Bradford Cornell & Wayne R. Landsman, 2002. "When Is Bad News Really Bad News?," Journal of Finance, American Finance Association, vol. 57(6), pages 2507-2532, December.
    13. Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
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    Cited by:

    1. Wisniewski, Tomasz Piotr & Lambe, Brendan John, 2015. "Does economic policy uncertainty drive CDS spreads?," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 447-458.

    More about this item

    Keywords

    Credit default swap; market efficiency; earnings announcements; credit ratings.;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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