Are Credit Default Swaps a Sideshow? Evidence That Information Flows from Equity to CDS Markets

This article provides evidence that equity returns lead credit protection returns at daily and weekly frequencies, whereas credit protection returns do not lead equity returns. Our results indicate that informed traders are primarily active in the equity market rather than the credit default swap (C...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2015-06, Vol.50 (3), p.543-567
Main Authors: Hilscher, Jens, Pollet, Joshua M., Wilson, Mungo
Format: Article
Language:English
Subjects:
Attention deficits
Credit
Credit default swaps
Credit ratings
Earnings
Equity
Heteroskedasticity
News
Quantitative analysis
Standard error
Statistical significance
Stock markets
Transaction costs
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Summary:This article provides evidence that equity returns lead credit protection returns at daily and weekly frequencies, whereas credit protection returns do not lead equity returns. Our results indicate that informed traders are primarily active in the equity market rather than the credit default swap (CDS) market. These findings are consistent with standard theories of market selection by informed traders in which market selection is determined partially by transaction costs. We also find that credit protection returns respond more quickly during salient news events (earnings announcements) compared to days with similar equity returns and turnover. This evidence provides support for explanations related to investor inattention.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109015000228