The extent of informational efficiency in the credit default swap market: evidence from post-earnings announcement returns

Nicole Thorne Jenkins (), Michael D. Kimbrough () and Juan Wang ()
Additional contact information
Nicole Thorne Jenkins: University of Kentucky
Michael D. Kimbrough: University of Maryland
Juan Wang: Central Connecticut State University

Review of Quantitative Finance and Accounting, 2016, vol. 46, issue 4, No 2, 725-761

Abstract: Abstract Under semi-strong market efficiency future returns are unpredictable from previously released information. We test the degree of semi-strong form market efficiency in the credit default swap (CDS) market by examining the relationship between subsequent CDS returns and previously announced quarterly earnings surprises and quarterly accruals, both of which have been the source of stock market anomalies. We conduct our analysis over three time periods: (1) before the credit crisis that spanned from July 2007 to June 2009, (2) during the credit crisis, and (3) after the credit crisis. Both before and after the credit crisis, the CDS market was efficient, exhibiting no systematic relation between subsequent CDS returns and previously announced accounting information. During the credit crisis, however, we find that both quarterly earnings surprises and quarterly accruals are associated with systematic patterns in subsequent CDS returns that are consistent with underreaction to both measures. In the latter stages of the crisis, the pattern reverses, consistent with the CDS market overreacting to both measures although the overreaction is short-lived. Collectively, our results indicate that the CDS market is efficient during periods of relative economic stability but call into question its efficiency during less stable economic periods.

Keywords: Credit default swaps; Market efficiency; Default risk; Post earnings announcement drift; Accrual anomaly (search for similar items in EconPapers)
JEL-codes: G13 G32 M41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://link.springer.com/10.1007/s11156-014-0484-y Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:46:y:2016:i:4:d:10.1007_s11156-014-0484-y

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-014-0484-y

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().