Abstract

http://ssrn.com/abstract=1980860
 
 

References (19)



 


 



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


Ian W. Marsh


City University London - Sir John Cass Business School

Wolf Wagner


Tilburg University, Department of Economics and the European Banking Center

January 25, 2012

European Banking Center Discussion Paper No. 2012-004
CentER Discussion Paper Discussion Paper Series No. 2012-006

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 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.

Number of Pages in PDF File: 41

Keywords: price discovery, CDS, hedging demand, informational asymmetries

JEL Classification: G12, G15, G21

working papers series


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Date posted: January 6, 2012 ; Last revised: January 25, 2012

Suggested Citation

Marsh, Ian W. and Wagner, Wolf, Why is Price Discovery in Credit Default Swap Markets News-Specific? (January 25, 2012). European Banking Center Discussion Paper No. 2012-004. Available at SSRN: http://ssrn.com/abstract=1980860 or http://dx.doi.org/10.2139/ssrn.1980860

Contact Information

Ian William Marsh
City University London - Sir John Cass Business School ( email )
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 5121 (Phone)
+44 20 7040 8881 (Fax)
HOME PAGE: http://www.cass.city.ac.uk/faculty/i.marsh
Wolf Wagner (Contact Author)
Tilburg University, Department of Economics and the European Banking Center ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
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