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

Ian W. Marsh and Wolf Wagner

No 6/2012, Bank of Finland Research Discussion Papers from Bank of Finland

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 (search for similar items in EconPapers)
JEL-codes: G12 G15 G21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (3)

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