Explaining co-movements between equity and CDS bid-ask spreads

Miriam Marra ()
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Miriam Marra: University of Reading

Review of Quantitative Finance and Accounting, 2017, vol. 49, issue 3, No 9, 853 pages

Abstract: Abstract In this paper I show that the co-movements between bid-ask spreads of equities and credit default swaps vary over time and increase over crisis periods. The co-movements are strongly related to systematic risk factors and to the theoretical debt-to-equity hedge ratio. I document that hedging and asymmetric information, besides higher funding costs and market volatility risk, are driving factors of the commonality and are significantly priced in CDS bid-ask spreads.

Keywords: Credit default swap; Bid-ask spread co-movement; Funding costs; Systematic risk; Hedging; Capital structure arbitrage (search for similar items in EconPapers)
JEL-codes: G1 G12 G14 G19 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-016-0609-6

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