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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.

One of the most important recent innovations in financial markets has been the development of credit derivative products that allow banks to more actively manage their credit portfolios than ever before.We analyse the effect that access to these markets has had on the lending behaviour of a sample of banks, using a sample of banks that have not accessed these markets as a control group.We find that banks that adopt advanced credit risk management techniques (proxied by the issuance of at least one collateralized loan obligation) experience a permanent increase in their target loan levels of around 50%.Partial adjustment to this target, however, means that the impact on actual loan levels is spread over several years.Our findings confirm the general efficiency-enhancing implications of new risk management techniques in a world with frictions suggested in the theoretical literature.

Although innovative credit risk transfer techniques help to allocate risk more optimally, policy-makers worry that they may detrimentally affect the effort spent by financial intermediaries in screening and monitoring credit exposures.This paper examines the equity market's response to loan announcements.In common with the literature it reports a significantly positive average excess return – the well known 'bank certification' effect.However, if the lending bank is known to actively manage its credit risk exposure through large scale securitization programmes then the magnitude of the effect falls by two-thirds.The equity market does not appear to place any value on news of loans extended by banks that are known to transfer credit risk off their books.

This paper summarises the results of a survey of UK based\ud foreign exchange dealers conducted in 1998. It addresses topics in three\ud main areas: The microeconomic operation of the foreign exchange\ud market; the beliefs of dealers regarding the importance, or otherwise, of\ud macroeconomic fundamental factors in affecting exchange rates;\ud microstructure factors in FX. We find that heterogeneity of traders’ beliefs\ud is evident from the results but that it is not possible to explain such\ud disagreements in terms of institutional detail, rank or trading technique\ud (e.g. technical analysts versus fundamentalists). As expected, nonfundamental\ud factors are thought to dominate short horizon changes in\ud exchange rates, but fundamentals are deemed important over much\ud shorter horizons that the mainstream empirical literature would suggest.\ud Finally, market ‘norms’ and behavioural phenomena are very strong in the\ud FX market and appear to be key determinants of the bid-ask spread.

This paper presents a simultaneous model of exchange rates\ud between the three major countries. In addition to incorporating long-run\ud equilibria and short-run dynamics, the model is designed to capture\ud complex interactions between currencies not normally considered in\ud exchange rate models. These interactions are shown to be important via\ud generalised impulse response analysis, and the model as a whole to be\ud an economically and statistically superior forecasting tool over relatively\ud short horizons.

This paper investigates the presence of cointegration between stock prices and dividends for a panel of 56 large UK companies. Using new techniques which account for integrated processes in a panel context we demonstrate that stock prices and dividends are cointegrated, with an implied common discount rate of 5.8%.

A database of individual forecasters' exchange rate\ud predictions is analyzed. We demonstrate that only a small minority can\ud be classed as rational, that most forecasts are inferior to easily available\ud alternatives, and that relatively good performance in one period is not a\ud reliable indicator of relatively good performance in subsequent periods.