Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2012-04-02
Number: 12-033/IV/DSF33
Author-Name: Ian W. Marsh
Author-Email: i.marsh@city.ac.uk
Author-Workplace-Name: Cass Business School
Author-Name: Wolf Wagner
Author-Email: w.wagner@uvt.nl
Author-Workplace-Name: Tilburg University, and Duisenberg school of finance
Title: Why is Price Discovery in Credit Default Swap Markets News-Specific?
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 <I>common</I> (and not firm-specific) news and arises predominantly in response to <I>positive</I> (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.
Classification-JEL: G1, G12, G14
Keywords: price discovery, hedging demand, CDS markets, equity markets
File-Url: https://papers.tinbergen.nl/12033.pdf
File-Format: application/pdf
File-Size: 554376 bytes
Handle: RePEc:tin:wpaper:20120033