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

I. Marsch, W.B. Wagner

Research output: Working paperDiscussion paperOther research output

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Abstract

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 CDSlag 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 newsspecific 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 newsspecificity are related to various firm-level proxies for hedging demand in the cross-section as well measures for economy-wide informational asymmetries over time.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages41
Volume2012-006
Publication statusPublished - 2012

Publication series

NameCentER Discussion Paper
Volume2012-006

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Price discovery
Credit default swaps
News
Hedging
Lag
Equity returns
Equity
Institutional investors
Informational asymmetry
Cross section
Equity markets
Dealers

Keywords

  • price discovery
  • CDS
  • hedging demand
  • informational asymmetries

Cite this

Marsch, I., & Wagner, W. B. (2012). Why is Price Discovery in Credit Default Swap Markets News-Specific? (CentER Discussion Paper; Vol. 2012-006). Tilburg: Economics.
Marsch, I. ; Wagner, W.B. / Why is Price Discovery in Credit Default Swap Markets News-Specific?. Tilburg : Economics, 2012. (CentER Discussion Paper).
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Marsch, I & Wagner, WB 2012 'Why is Price Discovery in Credit Default Swap Markets News-Specific?' CentER Discussion Paper, vol. 2012-006, Economics, Tilburg.

Why is Price Discovery in Credit Default Swap Markets News-Specific? / Marsch, I.; Wagner, W.B.

Tilburg : Economics, 2012. (CentER Discussion Paper; Vol. 2012-006).

Research output: Working paperDiscussion paperOther research output

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Marsch I, Wagner WB. Why is Price Discovery in Credit Default Swap Markets News-Specific? Tilburg: Economics. 2012. (CentER Discussion Paper).