Are credit default swaps a sideshow? Evidence that Information Flows from Equity to CDS Markets

Jens Hilscher, Joshua Pollet () and Mungo Wilson ()
Additional contact information
Joshua Pollet: Broad College of Business, Michigan State University
Mungo Wilson: Saïd Business School, Oxford University

No 35, Working Papers from Brandeis University, Department of Economics and International Business School

Abstract: This paper provides evidence that equity returns lead credit protection returns at daily and weekly frequencies, while credit protection returns do not lead equity returns. Our results indicate that informed traders are primarily active in the equity rather than the CDS market. These ?ndings are consistent with standard theories of market selection by informed traders in which market selection is deter- mined partially by transaction costs. We also ?nd that credit protection returns respond more quickly during salient news events (earnings announcements) com- pared to days with similar equity returns and turnover. This evidence provides support for explanations related to investor inattention.

Keywords: CDS; Market Segmentation; Inattention (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2011-07, Revised 2013-05
New Economics Papers: this item is included in nep-fmk and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP35.pdf First version, 2011 (application/pdf)
http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP35R.pdf Revised version, 2012 (application/pdf)
http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP35R2.pdf Revised version, 2013 (application/pdf)

Related works:
Journal Article: Are Credit Default Swaps a Sideshow? Evidence That Information Flows from Equity to CDS Markets (2015)
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