1. Why is Price Discovery in Credit Default Swap Markets News-Specific?
- Author
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Marsh, Ian W. and Wagner , Wolf
- Subjects
jel:G14 ,jel:G15 ,jel:G1 ,price discovery, hedging demand, CDS markets, equity markets ,jel:G12 ,jel:G21 ,credit default swaps ,price discovery ,informational efficiency ,hedging demand - 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.
- Published
- 2012