Research Discussion Papers, Bank of Finland
No 6/2012:
Why is price discovery in credit default swap markets news-specific?
Ian W. Marsh ()
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
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
BoF_DP_1206.pdf 
Download Statistics
Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design by Joachim Ekebom
