Why is price discovery in credit default swap markets news-specific?

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Title: Why is price discovery in credit default swap markets news-specific?
Author: Marsh, Ian W. ; Wagner, Wolf
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 6/2012
Year of publication: 2012
Publication date: 1.2.2012
Pages: 43 s.
Keywords: rahoitusmarkkinat; hinnat; luotot; maksuvaikeudet; Swapit; informaatio; suojautuminen; tuotot; USA; CDS; uutiset
JEL: G12; G15; G21
Abstract: We analyse daily lead-lag patterns in US equity and credit default swap (CDS) returns. We first document that equity returns robustly lead CDS returns. However, we find that the CDS-lag is due to common (and not firm-specific) news and arises predominantly in response to positive (instead of negative) equity market news. We provide an explanation for this news-specific price discovery based on dealers in the CDS market exploiting their informational advantage vis-à-vis institutional investors with hedging demands. In support of this explanation we find that the CDS-lag and its news-specificity are related to various firm-level proxies for hedging demand in the cross-section as well measures for economy-wide informational asymmetries over time. Keywords: credit default swap, price discovery, informational efficiency, hedging demand JEL codes: G12, G15, G21
Rights: https://helda.helsinki.fi/bof/copyright

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