When do CDS spreads lead? Rating events, private entities, and firm-specific information flows

Jongsub Lee, Andy Naranjo and Guner Velioglu

Journal of Financial Economics, 2018, vol. 130, issue 3, 556-578

Abstract: We find that credit default swap (CDS) spreads contribute significantly to price discovery in financial markets when firm-specific credit information is prominent. Using 3,470 S&P rating notch and watch changes for US public and private entities from 2001–2013, we show that CDS prices contain unique firm credit risk information that is not captured by the prices of other related securities such as stocks and bonds of the same firm. Credit information unidirectionally flows from CDS to bonds, particularly for private entities whose stocks are not concurrently trading in markets. We further find that CDS returns significantly predict stock returns, particularly their idiosyncratic components.

Keywords: CDS versus stocks and bonds; Credit ratings; Firm-specific credit information flow; Lead-lag relations; Private firms (search for similar items in EconPapers)
JEL-codes: D80 G14 G20 G32 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (52)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:130:y:2018:i:3:p:556-578

DOI: 10.1016/j.jfineco.2018.07.011

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