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

I. Marsch, W.B. Wagner

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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

Keywords

  • price discovery
  • CDS
  • hedging demand
  • informational asymmetries

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