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Are Credit Default Swaps a Sideshow? Evidence That Information Flows from Equity to CDS Markets

Published online by Cambridge University Press:  04 August 2015

Jens Hilscher ,
Joshua M. Pollet  and
Mungo Wilson
Jens Hilscher*
Affiliation:
[email protected], International Business School, Brandeis University, Waltham, MA 02453, USA
Joshua M. Pollet
Affiliation:
[email protected], College of Business, University of Illinois, Champaign, IL 61820, USA
Mungo Wilson
Affiliation:
[email protected], Saïd Business School, Oxford University, and Oxford-Man Institute, Oxford OX1 1HP, UK.
*
*Corresponding author: [email protected]
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Abstract

This article provides evidence that equity returns lead credit protection returns at daily and weekly frequencies, whereas credit protection returns do not lead equity returns. Our results indicate that informed traders are primarily active in the equity market rather than the credit default swap (CDS) market. These findings are consistent with standard theories of market selection by informed traders in which market selection is determined partially by transaction costs. We also find that credit protection returns respond more quickly during salient news events (earnings announcements) compared to days with similar equity returns and turnover. This evidence provides support for explanations related to investor inattention.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 543 - 567
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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