Why is Price Discovery in Credit Default Swap Markets News-Specific?

Ian Marsh () and Wolf Wagner ()

Tinbergen Institute Discussion Papers from Tinbergen Institute

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: price discovery; hedging demand; CDS markets; equity markets (search for similar items in EconPapers)
JEL-codes: G1 G12 G14 (search for similar items in EconPapers)
Date: 2012-04-02
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Citations: View citations in EconPapers (17)

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Working Paper: Why is Price Discovery in Credit Default Swap Markets News-Specific? (2012)
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