Insider Trading in Credit Derivatives

Viral V. Acharya () and Tim Johnson

No 5180, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Insider trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we report evidence of significant incremental information revelation in the credit default swap (CDS) market, consistent with the occurrence of insider trading. We show that the degree of this activity increases with the number of banks that have lending/monitoring relations with a given firm, and that this effect is robust to controls for non-informational trade. Furthermore, consistent with hedging activity by informed banks with loan exposure, information revelation in the CDS market is asymmetric, consisting exclusively of bad news. We find no evidence, however, that the degree of insider activity adversely affects prices or liquidity in either the equity or credit markets. If anything, with regard to liquidity, the reverse appears to be true.

Keywords: adverse selection; asset pricing; bank relationship; credit default swaps; default (search for similar items in EconPapers)
JEL-codes: D8 G12 G13 G14 G20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-fmk
Date: 2005-08
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Journal Article: Insider trading in credit derivatives (2007)
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