Research Discussion Papers, Bank of Finland
Ian W. Marsh
Why is price discovery in credit default swap markets news-specific?
() and Wolf Wagner
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 as measures for
economy-wide informational asymmetries over time.
Keywords: credit default swaps; price discovery; informational efficiency; hedging demand; (follow links to similar papers)
JEL-Codes: G12; G15; G21; (follow links to similar papers)
41 pages, February 2, 2012
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